With more than US$3 trillion in corporate debt set to mature amid elevated interest rates, refinancing risks are rising, says Moody’s Investors Service.
In a new report, the rating agency said that about US$1.26 trillion worth of investment-grade corporate bonds is set to mature between 2024 and 2028.
“Higher-for-longer interest rates increase refinancing costs, a credit negative,” Moody’s said. “Companies looking to refinance will continue to face higher funding costs because stubborn inflation is keeping benchmark rates elevated.”
Refinancing risk is also on the rise for U.S. speculative-grade companies, it said, “as maturities surge to $1.87 trillion amid tight financial conditions.”
The quantity of speculative-grade debt that’s maturing over the next five years is up 27% from last year’s already-record level. The amount maturing in the 2024-2025 period has grown by about 25% to US$333 billion, “raising near-term refinancing risk,” Moody’s said.
While the risk of a recession has declined a bit, the U.S. economy is still expected to slow in the year ahead. Moody’s is forecasting that U.S. real GDP will grow 1.9% this year and just 1.0% in 2024.
Against this backdrop and the refinancing risk, default risk is rising, Moody’s said, as the share of debt that’s held by the lowest-rated companies has increased.
“We expect the U.S. speculative-grade default rate will peak at 5.6% in January 2024 before easing to 4.6% by August 2024,” it said.
Among investment-grade companies, “credit spreads remain in line with historical levels, despite higher benchmark rates,” Moody’s said, adding that this underscores the companies’ credit quality.
“Corporate cash piles are up 10% versus last year as of June. Liquidity positions are solid for investment-grade issuers and partially mitigate refunding risk,” it said.