Credit Maturity Wall: Not As Difficult A Climb As It May Seem

Summary

• A much-flagged risk for this year is that, due to the Fed’s 2022-23 hiking cycle, the wall of maturing debt will face significantly higher refinancing costs, potentially triggering a spike in defaults.
• Except for the lowest-quality segments of the credit spectrum, the broader credit space should be able to climb the wall relatively unscathed.
• A record number of bonds issued during the pandemic at very low interest rates are set to mature over the next six years.

By Seema Shah, Chief Global Strategist

A much-flagged risk for this year is that, due to the Fed’s 2022-23 hiking cycle, the wall of maturing debt will face significantly higher refinancing costs, potentially triggering a spike in defaults.

However, assuming the economy remains fairly robust, a deeper look into the refinancing dynamics shows that, except for the lowest-quality segments of the credit spectrum, the broader credit space should be able to climb the wall relatively unscathed.

High yield maturity wall by credit quality

$billions of debt scheduled to mature per year

Source: Bloomberg, Principal Asset Management. Data represents the U.S. High Yield 2% Issuer Cap index. As this index excludes bonds that mature within the next year, the chart does not include any bonds maturing in 2024.

A record number of bonds issued during the pandemic at very low interest rates are set to mature over the next six years. In fact, within the next three years, a quarter of all U.S. high-yield debt will need to be refinanced at rates higher than what corporations have been accustomed to in recent years.

Although the elevated interest rate environment has spooked some investors into fearing that higher refinancing costs will lead to a sharp spike in defaults, a closer look reveals several factors that suggest most companies are in a good position to climb the debt maturity wall relatively unscathed:

• A resilient macro backdrop: Despite rising interest rates, high yield credit spreads remain narrow, reflecting strong market fundamentals and optimism that the Fed will steer the economy to a soft landing.
• Recent rally in bonds: Market conditions have improved, reducing refinancing costs compared to five months ago, thanks to a sharp rally in rates toward the end of 2023.
• The maturity wall leans toward higher quality: The high-yield maturity wall is quality-biased, primarily composed of higher-quality BB and B issuers.

While the maturity wall presents initial concerns, upcoming rate cuts and solid corporate balance sheets suggest most companies should be able to digest the higher interest rate costs without too much strain.

Still, lower-quality corporates may face tougher challenges, underscoring the importance of active management in the period ahead.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.