It's Time for a Credit 'Temperature Check'

Anyone watching the corporate-debt landscape got a big surprise back in April...

We expected borrowing to slow way down as the Federal Reserve kept interest rates high. Companies should have been scared to refinance.

But instead, the opposite happened. Companies started to borrow more. And in doing so, they slashed their near-term debt maturities... making the debt landscape far less intimidating.

We're now approaching the fourth quarter of 2024. Creditors are taking swift measures to protect themselves from potential bankruptcies, as we covered earlier this week. So they're getting more concerned about debt again.

Not to mention, the Federal Reserve just cut interest rates... which suggests it's getting concerned about the economy cooling off. The last thing you want when the economy starts struggling is a credit crisis.

With so many changes to the economic landscape, it's high time for a "temperature check." So today, we'll discuss how refinancing activities have evolved since the start of the year... and explain how these changes impact credit risk.

You can't have a wave of bankruptcies without looming debt maturities...

And according to Bloomberg, those maturities are still being pushed out.

As of August, nonfinancial companies with at least one "junk" rating had already refinanced or paid off more than $170 billion worth of junk bonds due over the following two years. That's more than any full year ever.

It even exceeds the amount repaid throughout all of 2021, when refinancing activities surged due to exceptionally low interest rates.

Take a look...

As you can see, the next two years' worth of huge debt headwalls are melting away. That makes it a lot harder to enter a debt crisis... considering there's far less debt due soon.

In short, 2024 has been the year of high-yield debt...

Corporations have issued more than $350 billion worth of high-yield bonds this year, the largest bond issuance since the pandemic. And we still have months to go.

High demand from investors has fueled the surge. And for companies that struggled to access the regular debt market, the $1.7 trillion private credit market made it easier than ever to refinance.

Without a credit crunch, we're safe from a sudden recessionary threat or a wave of bankruptcies for now.

But companies that refinanced didn't take care of their debt. They just delayed it by a couple of years.

While we've softened the risk of a recession, we haven't eliminated it...

A downturn probably isn't this year's problem, or even next year's. And as long as companies keep finding ways to delay their debt maturities, the economy will likely keep chugging along.

The Fed's 50-basis-point initial cut last Wednesday means more attractive refinancing opportunities. Companies should be able to keep refinancing in the coming quarters.

But in order to completely eliminate the risk of a serious recession, they have a lot more debt to deal with.

Credit risk is still cooling down for the moment. However, companies can't push those headwalls out forever. Watch closely how refinancing activity unfolds for the rest of the year.

Regards,

Rob Spivey
September 26, 2024