Nicole Bullock
US companies with the lowest credit ratings could struggle to refinance about $80bn of debt maturing in the coming years as sovereign debt problems potentially threaten their access to the capital markets and banks in both Europe and the US look at retreating from speculative lending, Moody?s Investors Service has warned in a new report.
The largest debt issuers in this category are some of the big buy-outs struck at the height of the credit boom, including Clear Channel Communications, with more than $16bn of debt due through 2016, Texas Competitive Electric Holdings, formerly TXU, with almost $11bn and Caesars Entertainment, formerly Harrah?s, with close to $8bn.
Debt maturities for companies with ratings below investment grade, or junk, are generally manageable, however, the rating agency said. Thanks to robust financial markets in the first part of 2011, these companies have extended the bulk of upcoming maturities on their debt, known in market parlance as the ?maturity wall,? to 2016 from 2014, giving some breathing room for the eurozone problems to play out.
Over the next five years, junk-rated companies have to refinance $668bn of bank loans and bonds, with close to 40 per cent due in 2016. That compares with last year when aggregate maturities totalled $693bn over a five-year time frame, with 2014 then the peak year for maturities.
The outlook is less optimistic for the 25 companies that are rated B3 with a negative outlook or lower, the bottom tier of the credit spectrum. They account for 12 per cent, or about $80bn, of the debt coming due through 2016.
?Many of these companies will face challenges refinancing their debt, especially if their capital structures are untenable and if business fundamentals do not improve,? Moody?s said.
Companies with large exposure to Europe could also struggle to refinance if the fallout from the region?s crisis impairs their ability to service debt, while there is the potential for a ?crowding out effect? from the financing needs of financial institutions, sovereign and municipal governments in the US.
?Investors may be more inclined to invest in asset classes other than speculative grade corporate issuers, especially the lowest rated companies,? Moody?s said.
At the same time, European banks, which have been major participants in the loan syndication market in the US, may retreat as they seek to deleverage and raise capital. Capital constraints on US banks, particularly Bank of America and Citigroup, related to Basel III banking rules mean that US banks may not be able to ?fully fill the void?, Moody?s said.
?We aren?t suggesting that banks will not lend at all and the markets will not lend at all,? said Kevin Cassidy, senior credit officer at Moody?s. ?But if the banks are under more pressure because of suggested or required capital levels, they are going to be more picky with their investments.?
Bank debt accounts for 70 per cent of the maturities in 2014, bonds dominate at 56 per cent in 2015 and bank debt rises to 63 per cent in 2016.
In total, just $27bn of bank and bond debt comes due this year and $67bn in 2013. Moody?s expects, that some companies may accelerate repayments of bank credit facilities with staggered maturities, refinancing more when they can and bringing the anticipated refinancing of bank debt to $166bn from $52bn this year and next.