Recovery Update: July 2010

Refinancing risk remains the main threat to credit quality for speculative-grade companies in both the U.S. and Europe. Nonfinancial U.S. corporate borrowers have more than $1.7 trillion in rated bonds and loans maturing from 2011 to 2014. At its peak in 2014, there is $474 billion projected to mature, 72% of which is comprised of speculative-grade debt. For Europe, we have estimated there is as much as €127 billion total leveraged loan debt maturing in 2014, although this is a static figure, which likely overestimates maturities, not taking into account repayments, amortization or companies that have defaulted. The Standard & Poor's European Leveraged Loan Index (ELLI) does take these kinds of events into consideration, and it shows nearly €41 billion in leveraged loans maturing in 2014 and almost €47 billion coming due in 2015. However, the ELLI is limited to loans held only by institutional investors in those transactions and to facilities that are components of the ELLI, so it likely underestimates the volume of debt maturing.

Companies have been able to use the high-yield bond market in both regions over the past 12 months as a tool to refinance some existing bank loans as well as outstanding bond debt, due to the greater availability of credit from low interest rates. In addition, many companies have pushed out loan and bond maturities through so-called amend-and-extend exercises, in which they make a concession – such as higher pricing or a smaller credit line – in exchange for a longer maturity.

However, many speculative-grade companies are still constrained by their highly leveraged financial risk profiles. In Europe, 61.9% of the ELLI debt maturing from 2013-2015 (based upon par amount outstanding) was issued by companies with current single-B ratings or credit estimates. We expect the extent of the economic recovery in Europe – specifically the market uncertainty from the state of the fiscal situations in Greece, Spain and Portugal – to affect the amount of free cash flow that these speculative-grade companies will be able to generate through growth for deleveraging. Another part of the equation will be the level of willingness of new or existing investors to inject new equity into these companies, which would restore confidence, according to our recent article "Refinancing Risk Remains The Main Threat To The Credit Quality Of European Speculative-Grade Companies."

In the U.S., we see companies rated 'B-' or lower to be more exposed to refinancing risk and we also have flagged that consumer-dependent companies and others that were hardest hit by the recent economic recession will face the greatest refinancing challenge. According to the recent article "Wave Of Debt Coming Due May Wash Away Some U.S. Speculative-Grade Borrowers", restaurants and retailers have $8.9 billion in debt in 2011, $12 billion in 2010, and $16.9 billion in 2013. Meanwhile, media, entertainment and leisure companies have a full $50.6 billion maturing in 2013.