Magazine article Financial Management (UK)

Wall of Debt: More Than $3Trn of Corporate Debt Will Reach Maturity between Now and 2015. Is the World Heading for a Refinancing Crunch? and How Can Your Company Head off the Risks? Anousha Sakoui Reports

Magazine article Financial Management (UK)

Wall of Debt: More Than $3Trn of Corporate Debt Will Reach Maturity between Now and 2015. Is the World Heading for a Refinancing Crunch? and How Can Your Company Head off the Risks? Anousha Sakoui Reports

Article excerpt

In the wake of the global financial crisis, companies worldwide had to stand by and watch as the funding pools they had relied upon for years evaporated.

This has had a profound effect on treasury teams and CFOs. Fears that banks would pull credit lines at a time when capital markets were in turmoil prompted companies to sell bonds at record rates in the months after the financial storm broke. Indeed, 2009 was a record year for bond sales, while 2010 has seen a rush to refinance bank debt with bonds from speculative-grade companies.

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But funding fears persist. Despite significant refinancing activity over the past two years, many bankers and investors remain concerned about the "wall" of outstanding debt.

Real problems

"Companies should be worried about the refinancing wall," says Simon Boadle, head of debt advisory at PwC. "The bank market is still weak and the high-yield market is not deep enough to meet full refinancing needs. In addition, this market is volatile and prone to open and close as a result of changes in market conditions. Investors could get a lot more selective and the high yield tap might turn off."

So far, inflows into credit funds--particularly high-yield bond funds--have meant that demand for bonds from investors searching for yield has been strong. More than $250bn of junk bonds were sold globally in 2010--more than in any other year, according to Credit Suisse.

"We are seeing investment grade, crossover and high-yield companies rolling over financing in the bond and loan markets, meaning that much of the refinancing 'time bomb' is in the process of being alleviated," says Mark Lewellen, head of European corporate origination at Barclays Capital. "Corpo-rates are resizing revolving credit facilities and leaving them undrawn and then taking up liquidity from the bond market. If M&A activity picks up it may trigger more bond issuance."

But the big question is whether the corporate bond markets will be able to sustain such demand and absorb the amount of debt that needs to be refinanced in the coming years. "If long-term rates rise, bond markets will become less attractive to companies and there may not be enough bank capital to meet corporate refinancing needs. That is what companies should be worried about," says James Douglas, corporate finance debt advisory partner at Deloitte. "Refinancing pressure is greatest in 2012 and 2013, and this will manifest itself in the form of refinancing activity in 2011."

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Payback time

Standard & Poor's estimates that about $2. in rated bonds and loans will mature from 2012 to 2015 for non-financial US corporate borrowers. In Europe, Moody's estimates that $1trn worth of total debt (both rated and unrated) is due to mature from 2011 to 2014, of which only 37 per cent is bank debt. Douglas believes it will be smaller corporates and financial, sponsor-backed leveraged companies that will face the greatest refinancing problems.

Analysts at Moody's say risks arise because the refinancing needs of companies might affect the future cost of debt and could take place when the borrowing needs of large sovereign issuers are still heightened.

In 2010, with interest rates near zero, the bond markets allowed many companies to secure historically low costs of funding. One example last summer was information technology group IBM. In August, it raised $1.5bn from the bond market at 1 per cent--the lowest ever coupon on a three-year corporate bond.

This improvement in pricing over the past year and a half was well illustrated by Sanctuary Group, a UK-based housing association, which in the second quarter launched a tap to its [pounds sterling]200m bond issued last year. The tap was priced at 100 basis points, the lowest pricing achieved in the sector since the credit crunch, and compares to pricing on the original bond at the height of the credit crunch in March 2009 of 260 basis points, according to PwC. …

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