Markets

Maturing junk debt hits record, posing elevated default risks, Moody's says

Key Points
  • Speculative-rated debt maturing over the next five years has risen to a record $1.2 trillion, according to Moody's.
  • While default rates remain low, changing conditions pose significant default risks as companies slide down the ratings ladder.
  • A slowdown in economic growth or spike in rates could pose adverse effects to the issuers of such debt.

Corporate America is awash in junk debt, and the situation could deteriorate substantially in the next five years as a record amount of issuance comes due.

Moody's Investors Service warned Thursday that default risk is on the rise for the nearly $1.2 trillion of speculative-grade loans, bonds and various related instruments maturing from 2020-24. That total is a record for maturities coming due over a five-year period, up 14% from 2019.

While low interest rates have allowed spec-rated companies to continue to roll over all that paper, a slowdown in the economy or a reversal in Federal Reserve monetary policy could pose problems.

A bigger issue may be that so many companies are slowly sliding down the rating scale.

Moody's notes that 36% of the total bank maturities in the speculative sphere are rated B3 or lower, up from 33% a year ago. That B3 rating is at the bottom of the "highly speculative" ladder and just above the level considered to carry substantial risk. In all, single B-rated loans now constitute more than half of the issues maturing in the next five years, also a record.

"This greater percentage of lower-rated loans points to higher defaults in the next downturn," a team led by Moody's senior analyst Anastasija Johnson said in a report.

Moody's also warned that a swath of investment-grade companies continue to pose risks of replicating Ford Motor's move in 2019 in falling to speculative-grade debt. Companies the ratings agency named included Newell Brands, Western Digital and Elanco Animal Health, all of which carry Baa3 negative ratings.

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At a sector level, about a fifth of the maturing debt total comes from a group of sectors all with negative outlooks — telecom, manufacturing, chemicals, steel, paper and forest products, coal producers, railroads, and auto manufacturers and parts suppliers. Just two industries, telecom and newspapers and magazines, had negative outlooks in 2019.

Oil and gas had the highest default rate in 2019 and holds 8% of the speculative-grade debt.

The lowest end of the spectrum, which includes bank debt rated Caa and lower, rose to $61 billion from $45 billion a year ago but still represented 8% of the total in speculative grade. Loans constitute 63% of the maturing debt, the highest proportion since 2014 and, at $750 billion, the highest dollar figure on record.

"This riskiest debt class dominates 2020 bank loan maturities, pointing to higher near-term risk for loans," Johnson wrote.

However, with a stable economy the default risks remain relatively low, at just 3.5% over the next 12 months, which would be a decline from the 4.2% rate in December and below the historical average of 4.6%. But the default rate also was below 4% prior to the financial crisis in 2008 before spiking to 10%.

In a separate report, Moody's said nearly $1.1 trillion in investment-grade bonds are maturing over the next five years. The service said conditions remain favorable for access to markets, with default risk limited to individual companies and market conditions.