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The 2014 HY Maturity Cliff: Bank of America's Take

Tyler Durden's picture




 

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.

 

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Wed, 02/24/2010 - 19:32 | 244140 Bear
Bear's picture

Buy Jan12 TBT Calls ... How can they lose?

Wed, 02/24/2010 - 20:01 | 244182 rubearish10
rubearish10's picture

WOW! Really?? Nice idea but with tracking errors on the underlying and premium decay on the call is like a double whammy. I'd rather take a mix of TBF, TBT and TLT Puts and be more nimble. It may cost more principle but you still get plenty of leverage. Your idea is pretty ballsy! Good luck.

Wed, 02/24/2010 - 19:34 | 244143 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Everybody knows the dice are loaded.......

Wed, 02/24/2010 - 19:36 | 244150 jm
jm's picture

I know that it is illegal for the Fed to purchase corporate bonds.  But can QE 4.0 purchase CBOs, CLOs, and CDOs?

Imagine the crappiest of all C-rated crap getting packaged post-haste to shove up the Fed balance sheet.

Wed, 02/24/2010 - 21:38 | 244286 Anonymous
Anonymous's picture

They can and were rumored to have bought corporate bonds in the 2002 meltdown, basically can monetize asphalt if they so desire....

Wed, 02/24/2010 - 19:41 | 244155 Cognitive Dissonance
Cognitive Dissonance's picture

"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."

This is a particularly astute statement. Essentially the Fed is causing the very problems it will claim force it to do what it ultimately wants to do. Talk about the cart leading the horse. Plausible deniability to the nth degree. Brilliant!

No one should ever call any of these Ponzi masters "stupid" because it's clearly not the case. This is genius, pure and simple. The really skilled player lets the opponent think they're winning, right up to the point where they're crushed.

Wed, 02/24/2010 - 20:40 | 244213 Great Depressio...
Great Depression Trader's picture

When the game is rigged how can you lose? These guys have access to a printing press. Imagine what you could do with those type of connections.

Wed, 02/24/2010 - 21:33 | 244277 perchprism
perchprism's picture

 

The whole concept of TBTF was a spinmeister's dream, and it was spun successfully, using fear and a hepped up sense of urgency and doomsaying.  Now we have a Frankenstein's Monster of moral hazard and policy precedent.  It's like we're all-in before the flop, holding a three and a ten, because we think the other players can be bluffed to fold.

Wed, 02/24/2010 - 21:49 | 244298 Anonymous
Anonymous's picture

TBT or any of the 2x or 3x won't work over time as they are reset daily.

Wed, 02/24/2010 - 21:56 | 244307 Anonymous
Anonymous's picture

the "Smart $" is screwing around with melting ice cubes like blockbuster and MNI

that's the spoils of war for some how surviving the turmoil the last few years....

....kissing the butts of big shop sales coverage to play secured debt with double digit yields with proceeds used to extend maturities

amend
extend
exchange
and just remember to sell

Thu, 02/25/2010 - 01:15 | 244556 Anonymous
Anonymous's picture

Look if TBT 2x doesn't work because of the daily reset problem then why not short both TBT and whatever the 2x long symbol is?

Thu, 02/25/2010 - 09:09 | 244702 Anonymous
Anonymous's picture

Welcome .....

Debt destruction.....

Debt destruction must occur in the US on a grand scale in order for the REAL economy to recover....

Let's make this simple....

1) One has $1000 in CASH....pays no interest

2) One has a $1000 in a bond....pays interest

Which is better ?

CASH

Because:

2)bond < $1000....and maybe $0....

Companies that sell "home safes" should be booming....

Sat, 04/17/2010 - 09:51 | 305486 Tom123456
Tom123456's picture

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Sat, 06/04/2011 - 23:12 | 1340513 chepurko
chepurko's picture

I am very new to this, so I am sorry if my question seems naive to most.

But can someone explain what is meant under "monetizing FRNs" and how is it connected with cliff maturities?

Thanks.

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