In yet another hangover from 2007, expect a wave of both investment grade and “junk” corporate debt coming due.
How big is the wave? About $1.7 trillion worth, according to a new report from Standard & Poor’s titled “Wave of Debt Coming Due May Wash Away Some U.S. Speculative-Grade Borrowers”. And that $1.7 trillion is just for non-financial corporations in the U.S.
According to S&P Managing Director John Bilardello, there is another $1.5-2.0 trillion dollars worth of corporate debt coming due outside of the U.S.
Part of the reason behind this debt hangover was the wave of leveraged buyouts (LBOs) in and around 2007. Those deals left some of the borrowers long debt, short cash. The debt has been getting rolled in so-called “amend-and-extend” deals and comes due over the next few years.
According to its author, S&P Managing Director John Bilardello, the message of the report is that we exist in a fragile credit environment and "exogenous events like the sovereign debt crisis in Europe will have an impact on the availability of liquidity and therefore on interest rates.”
That, in turn, “will impact corporate debt issuers in an environment where over the next 4-5 years, there is a lot of debt coming due.” Apparently, the ongoing sovereign debt crisis was not part of the plan.
The report highlights issues in consumer sectors—some of the areas hardest hit by the recession, including restaurants and retail, but most especially, entertainment and leisure. That sector is exposed to the tune of $17.7 billion coming due in 2011, $36.5 billion in 2012, and $50.6 billion maturing in 2013.
While this is bad news for companies struggling to recover in a wobbly economy, this could be good news for investors. If you believe in the economic recovery, more competition for cash and higher interest rates could mean higher returns for investors.
Standard & Poor’s Chief Economist David Wyss believes in the recovery, predicting GDP growth of 3.3 percent for 2010, 2.8 percent in 2011 and 2012.
Bilardello says,“ the question is, is this an environment in which investors will participate in that refinancing over the next couple of years? If it's not the securitization market (structured finance deals) and it's not commercial lenders, it will have to be the institutional investor, which may not have the capacity to invest in the amount coming due in next couple of years.”
And that lack of capacity by institutional investors may push some corporations back into the deep end or, at the very least, may raise the cost of borrowing money.