- The amount of high-yield debt that is coming due within two years is at its highest in over a decade, according to Goldman Sachs data.
- Many of these companies are not sufficiently creditworthy for the Fed to include them in its coronavirus stimulus plan.
- They will account for much of the jump in credit defaults in the coming months, a Goldman strategist said.
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Its Secondary Market Corporate Credit Facility was expanded to include purchases of exchange-traded funds that contain companies at the strongest end of the junk-bond market.
Companies further down the quality spectrum —and those likelier to default on their debt due to insufficient cash — were once again left in the lurch. And according to Goldman Sachs, they now face an additional risk that the Fed may not be able to salvage.
At issue is so-called refinancing risk: the possibility that these companies will not be able to finance the debt that is soon coming due soon by tapping investors who provide new, longer-term credit.
Time is quickly running out amid what’s shaping up to be the worst economic recession since the Great Depression. The share of high-yield debt that is due within the next two years is at its highest level since 2010, data compiled by Goldman Sachs showed. In dollar terms, the amount is at a high not seen since at least 2007.
The funding market for these lower-quality companies has essentially dried up because of widespread cash constraints and as investors reconsider how much risk they should be taking. Companies that would have refinanced their debt early under normal circumstances now face no choice but to let it mature.
Between March 5 and April 1, just one “small” deal came to fruition in the high yield primary market, Goldman strategist Spencer Rogers said in a recent note. Activity picked up between April 2 and April 15, when $13 billion was issued across 17 deals.
However, issuance still skews towards the most creditworthy borrowers that have the ratings to pass the Fed’s quality test.
“While the Fed’s facilities have reopened the primary market for investment grade and the highest quality high yield borrowers, the primary market is still essentially shut for the lowest quality names,” Rogers said.
He added, “The environment will likely remain challenging for lower quality issuers, especially in sectors that have been severely impacted by the twin oil-virus shock.”
It turns out that many of these stressed sectors will also have the largest refinancing needs during the months ahead as the crisis deepens.
Top of the list is airlines, with 46% of its debt maturing within the next two years. Thankfully, the Treasury’s direct cash injection should provide some assistance here.
But other industries face the double whammy of zero Fed support and being directly hit by the crisis. They include transportation & logistics (39% of debt is coming due), office/business equipment makers (39%), auto manufacturers (35%), and real estate (17%).
“We expect much of the pickup in defaults in the coming months to come from these industries,” Rogers said.