23 Apr 2024
AUTHOR | Kevin Bakker CFA, Mark Benbow, Thomas Hanson CFA, Ben Miller CFA
The maturity wall has been a hot topic lately—and rightfully so. After all, the ability of issuers to repay their debt obligations is a key consideration for bond investors. And assessing the upcoming maturity schedule becomes even more critical for high yield companies, some of which may face strained liquidity or challenges accessing capital markets.
With rates likely to remain elevated in the near term, will companies be able to address near-term maturities? How concerning is the upcoming maturity wall for investors? In this piece, we break down the high yield bond maturity wall and discuss why the outlook may not be as dire as some may think.
In recent years, the maturity wall has not been a major concern for high yield investors. Yes, it is always a consideration, but most companies were able to proactively refinance debt at cheap interest rates in 2020 and 2021. As a result, the amount of debt coming due in 2022 and 2023 was relatively low and wasn’t a major concern for investors. Many issuers also maintained healthy balance sheets and had ample liquidity. This provided most high yield companies with the luxury of time to address any upcoming maturity issues. And that proactiveness paid off, as many companies were not forced to refinance debt at high interest rates when central banks hiked rates in 2022 and 2023.
However, around the middle of 2023, investors started becoming more fixated on upcoming high yield bond maturity profiles. At that time, a record amount of high yield paper would mature in the next four years and the refinancing runway was becoming shorter. Higher rates meant higher borrowing costs, which in turn placed further pressure on companies. Still, the amount of debt coming due in 2024 looked manageable, but the maturities ballooned in 2025 and 2026. It was becoming increasingly apparent that companies would need to start making a concerted effort to address those looming maturities. Concerns about higher rates for longer exacerbated investors’ worries as companies may face unmanageable interest costs, especially those with floating-rate debt.
Fast forward to 2024. The Federal Reserve’s pivot in its monetary policy rhetoric in late 2023 (from aggressively raising rates to indicating a willingness to consider cutting rates) fueled a swift improvement in market sentiment, as investors and companies alike found comfort in the potential for rate cuts in 2024. As capital market conditions improved, companies capitalized on the opportunity to tackle near-term maturities. Refinancing activity picked up materially in the first few months of 2024. According to JP Morgan, February had the heaviest refinancing activity in high yield bonds since March 2021.1
Since December 2022, issuers have continued to chip away at upcoming debt maturities. The bonds coming due between 2024 and 2026 for US dollar-denominated high yield bonds has been reduced by approximately 26% since 2022. In our view, this improved maturity wall further supports a constructive outlook on high yield bonds. While fundamentals are showing signs of modest deterioration and the economy is slowing, many companies are in a solid position to repay debt maturities and avoid default.
December 2022: High yield bond maturity wall (USD billions)
February 2024: High yield bond maturity wall (USD billions)
Source: BofA Research. As of December 31, 2022 and February 29, 2024. Reflects US dollar-denominated high yield corporate bond debt.
The moderately improving economic outlook also bodes well for the maturity wall. Although slowing economic conditions do still present headwinds, the lower probability of a hard recession gives companies more flexibility to start proactively addressing their 2025 and 2026 bond maturities, further reducing near-term refinancing risk. If (or when) central banks begin to cut rates, we would expect refinancing activity to increase significantly, provided supportive capital market conditions persist.
While the overall outlook on the maturity wall has improved, lower-tier companies (CCC-rated bonds and below) present the biggest refinancing risk over the coming years. However, this segment is very idiosyncratic since those companies face nuanced challenges. Weaker firms are more likely to have issues accessing capital markets and those with elevated floating rate debt will face more headwinds.
In our view, the maturity wall risk can be mitigated through active selection and in-depth research. Given the challenges in certain lower-quality credits, investors may want to focus on high-quality high yield bonds and be very selective in the lower-rated part of the market. Careful research can help investors assess issuers’ maturity profiles and scrutinize issuers that have maturity wall concerns or inadequate liquidity. Overall, we believe the improved maturity schedule bodes well for the high yield market and recent refinancing activity has reduced near-term risks, however security and issuer selection are paramount to mitigating downside risk.
1JP Morgan as of February 2024. US dollar-denominated high yield bond issuance totaled $27.7 billion.
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