The debt bill companies have pushed to 2024

US junk bond issuance struggled to pass $100 billion in 2022, the lowest annual total since the Lehman Brothers collapse in 2008. With benchmark yields up from 4 to 9 per cent, corporate treasurers simply stayed away. They issued nothing, and ran down cash or drew on existing bank credit lines instead. Pushing maturities out does not make them go away, though, and the refinancing wall that once seemed a distant prospect now stands in 2024 and 2025.

Companies usually refinance well before debt enters its final twelve months. After that point it has to be reclassified as a current liability on the balance sheet, which can threaten covenants and bring awkward questions from auditors.

From record to drought

The collapse looks worse against what came before. Issuance hit a record in 2021, when low-rated companies could borrow for eight or ten years at the lowest yields on record. Much of that money went to refinancing, which is why so little debt matured this year and why treasurers could afford to wait.

The loan market froze too. Banks that had promised to fund leveraged buyouts before rates rose found they could not sell the debt without heavy losses, and the biggest example, the roughly $13 billion lent to finance Elon Musk's purchase of Twitter, is still sitting on their balance sheets. The banks behind the buyout of Citrix managed to offload part of their commitment in September, but only at a steep discount that turned the fees they had earned into losses. Hung deals like these fill underwriters' risk limits and make them reluctant to commit to anything new.

Cash piles run down

Staying away from the market was not free. Companies that skipped issuance paid for it by spending the cash they had raised in 2020 and 2021, when many borrowed more than they needed simply because money was cheap. Drawing on revolving credit lines filled the gap for others, but those lines are floating-rate, and their cost has risen with each move by the Fed.

The Federal Reserve has now lifted its target range to 4.25-4.5 per cent, and every quarter spent waiting for a better market eats into the cushion. A company that sat out 2022 with a comfortable cash balance may enter 2024 with a thinner one and the same bond to repay.

The bills come due

Between 2024 and 2026, hundreds of billions of dollars of speculative-grade debt sold in the cheap-money years of 2020 and 2021 will need replacing. Companies paying coupons of 4.25 per cent will have to sell new notes yielding 8.5 to 10 per cent.

That doubles the interest bill for businesses whose models assumed very cheap financing. The extra cash will come out of capital spending and research budgets, and the wider economy will grow more slowly as a result.

The calendar compresses the choice. A bond due in 2024 becomes a current liability at some point next year, so the decision to refinance cannot wait much longer. Treasurers who hope for lower yields are betting that the market will improve within that window.

Private credit fills the gap

Some borrowers have already found another door. Direct lenders, the private credit funds that lend without syndicating, financed several large buyouts this year that banks would once have underwritten. They charge more and demand tighter terms, but they can commit quickly and hold the loan themselves. That makes them the likely refinancing source for mid-sized companies shut out of public markets, at a floating rate that rises with the Fed.

The shift moves risk somewhere harder to see. Syndicated loans and bonds are priced daily, so trouble shows up quickly in their prices. Private loans are valued by the funds that hold them, often quarterly, and a borrower's difficulties can be handled through quiet amendments rather than a public markdown.

Only the strong get in

Not every borrower will get through the door when the market reopens. High-yield investors who lost money on duration in 2022 will demand tough covenants and a higher claim on collateral.

The best argument for calm comes from the last cycle. After 2008 analysts warned of a maturity wall in the years that followed, and it was climbed without mass defaults because the Fed held rates at zero and investors chased yield. A repeat would need rates to fall well before 2024, and the Fed's median projection instead has its policy rate above 5 per cent at the end of next year.

A second argument is inflation itself. Revenues at most companies have risen with prices this year, which lifts earnings in nominal terms while the face value of debt stays fixed. That helps businesses with pricing power, but it does little for those whose costs are rising faster than what they can charge, and high-yield indices are full of exactly those firms in retail, leisure and health services.

Who ends up holding the risk

The winners from a closed market are those with cash to lend. Private credit funds, distressed-debt investors and the handful of insurers with money to deploy can demand high coupons, strong covenants and equity sweeteners from borrowers with no alternative. Private equity owners are on the other side, since their returns depend on refinancing cheaply and selling at a good price, and neither is available.

The signals to watch are whether January, usually a busy month for new bonds, brings a rush of deals, the gap between yields on CCC-rated and BB-rated debt, and how fast banks can offload their hung buyout loans. A market that reopens for weak borrowers early next year would soften the call.

Top-tier industrial issuers with healthy cash flow will get their deals done, though on much thinner margins. CCC-rated credits and heavily indebted companies owned by private equity will find the syndicated market closed to them. Sitting out a bad year bought treasurers time, but when their debt falls due in 2024 and 2025 lenders will price it on solvency, and the weakest borrowers will probably not be able to refinance at any price.