The 2014 HY Maturity Cliff: Bank of America's Take
We have previously discussed the maturity cliff in Treasuries, Commercial Real Estate, Financials and High Yield. Focusing on the latter, a recent report from Moody's, indicated that there is roughly $800 billion in high yield bonds maturing by 2014. Today, Bank of America jumped on the HY maturity warning bandwagon, discussing the "maturity wall" which while alarming, is estimated by BofA to be $600 billion, or materially less than Moody's estimates. So while not in any way novel, Bank of America does provide a rather convincing view of the relative maturity schedule in HY currently versus the historical average in both loans and bonds. The results should be troubling to all CFOs and PE-owners of highly indebted organizations: absent raising equity rapidly, the ability to roll these loans in a rising interest rate environment will be next to impossible. Because with 89% of loans maturing in under 5 years (compared to 36% on average), and 50% of bonds (37% average), the maturity cliff, whether defined by Moody's or by Bank of America, is fast approaching.
Bank of America characterizes their observations as follows:
It becomes quite clear from these charts that maturity schedules are much more front-loaded today compared to their historically normal shapes. In loans, the bulk of maturities shifted from 5-7 years out historically to 3-5 years today. In HY bonds, the bulk used to be 7 years and beyond, whereas now it stands at 5-8 years. Another way to assess the degree of the shift is to measure how much debt matures in the next 5 years (an arbitrary timeframe). In loans, this metric used to be 36% of total amount outstanding, and it currently stands at 89%. In bonds, the shift is less dramatic, from 37% historically to 50% today. These findings provide further support to our view that defaults could turn higher once the combination of factors, including withdrawal of Fed liquidity and redefaults in distressed exchanges kick in sometime around 2011-2012. The amount of debt that is scheduled to mature around those dates and beyond remains an additional factor pointing in the same direction.
All this does, is reinforce the Fed's "no way out" situation whereby merely the hint of rising interest rates, especially in the 3-7 year part of the curve. To avoid that, all the Fed can do is to keep buying increasingly short duration assets until it ultimately hit the point of monetizing FRNs. Whether this is ultra- or merely-hyperinflationary is to be determined. Yet the fact that in a few years, rates may become entirely detached from fiscal, and consumer-purchasing forces, is a true testament to the ability of the Federal Reserve rip apart the very forces of supply and demand simply to prevent a few mega corporations from filing for bankruptcy.