Refunding risk in the loan market has plummeted, with $56 billion of bank debt maturing over the next three years, compared to $100 billion a year ago. The drop means less chance of defaults, but it also underscores the rate at which bank paper has been taken out via the bond market. The latest example is Ispat Inland, which is currently in the market with an $800 million note offering that will pay off all its bank debt. "The market is very attractive right now. It's an attempt to see if we can capture a decent rate at decent terms," said Tom McCue, Ispat's treasurer.
Many loan investors are concerned as companies are choosing to refinance their bank debt with fixed-rate bond deals. "At first, it was great because all the distressed companies we're doing it, but they're also taking out some good par credits now," a buysider said.
Some of the borrowers may be back. As a result of the aggressive bank debt refinancings there is a high percentage of high-yield bonds coming due in 2005 and 2006, according to Moody's Investors Service, which published the refunding risk report. "What that means is that the [bond] market needs to be relatively liquid so that we do not see these companies having difficulty refinancing when their maturities come due," said Paul Aran, v.p. and senior analyst with Moody's. If the market is less liquid, companies may find the need to refinance with a bank deal. "When the bonds mature, one of the options for the companies is to consider increasing their financing. It's obviously going to depend on bank rates at the time, bank appetite and bond appetite," Aran said.
Ispat may return to the bank market in the future. "The paper we're offering is paper that we think will be able to be callable and then we'll have rights to issue additional debt if we chose to," McCue said. "It's certainly possible we'll be back in the bank market. At this point in time, this is the better market for us."
McCue said he believes the lenders know what to expect. "It looks like the market is accepting," he said. "I do think the bank market knows the paper has a short life and we have to refinance it." McCue said there are more potential investors in the bond market. "The high-yield bond market is an extremely deep market, much deeper than the bank debt market," McCue noted. "There are a lot of investment dollars in the market. You can't go out for $800 million in a small market."