Some $94 billion of high-yield bonds and bank debt is set to mature over the next three years, raising questions of refinancing risk. Moody's Investors Service is hoisting a warning flag in a report that calls particular attention to companies rated Caa or lower. "At issue when the debt comes due is whether the market will accept and allow companies to refinance," said Paul Aran, a v.p. of and co-author of the report. "Those are the companies that are more subject to market dynamics because of weaker credit quality." Of the $94 billion, bank debt comprises $38 billion.
The amount coming due is down from prior years. But of specific concern is $12 billion of Caa or lower rated bond debt due between 2005-07. In just the first half of 2007, $28 billion of high-yield debt and $16 billion of B1-rated debt is set to mature.
Among the companies that have significant bank debt due are Goodyear Tire & Rubber Company, which has a $500 million and $800 million facility rated B1 due in March 2006 and a $650 million facility due March 2006 that is rated B2. It also has a $680 million deposit-funded facility due September 2007 rated B1. Owens-Brockway Glass Container has a $600 million facility and a $380 million facility, both rated B1, and due April 2007. On the bond side many companies have C-rated debt coming to maturity in the next three years. Rite Aid Corp. has $200 million of bond debt due April 2005 that is rated Caa1 and Qwest Capital Funding has $179.2 million due July 2004 which is rated Caa2.
A refinancing boom has led to improved liquidity by lowering company interest payments and delaying future maturities. This has allowed companies to improve their credit before their debt matures. But if the high-yield market weakens, B3 and lower-rated entities will be affected more adversely. Among the plethora of refinancings taking place, market players said many of these deals would not have had a chance in a tighter economic landscape. Aran admitted that some deals would not get done or at these interest rates if this was a weaker market. "That will probably change as interest rates change, liquidity changes," he noted.
One banker was harsher. "Every stupid deal is getting done...and most are stupid deals," He said. "I think everyone is aware that they are doing very aggressive transactions that in a tougher market may not have gotten done. But I think people are closing their eyes and jumping in because they have to stay invested."
