Sudden Death? Junk-Rated Companies Headed for Biggest “Refinancing Cliff” Ever: Moody’s

Wolf Richter's picture

Wolf Richter,

Most of the defaults, debt restructurings, and bankruptcies so far this year and last year were triggered when over-indebted cash-flow negative companies could not make interest payments on their debts.

During the crazy days of the peak of the credit bubble two years ago, they would have been able to borrow even more money at 8% or 9% and go on as if nothing happened. But those days are gone. Now the riskiest companies face interest costs of 20% or higher – if they’re able to get new money at all. Hence, the wave of debt restructurings and bankruptcies.

But that’s small fry. Now comes the wave of companies whose debts mature. They will have to borrow new money not only to fund their interest payments, cash-flow-negative operations, and capital expenditures, but also to pay off maturing debt.

That “refinancing cliff” is going to be the biggest, steepest ever, after the greatest credit bubble in US history when companies took on record amounts of debt, and it comes at the worst possible time, warned Moody’s in its annual report.

In its report a year ago, Moody’s had already warned that the refinancing cliff for junk-rated US companies over the next five years – at the time, from 2015 through 2019 – would hit $791 billion. Of that, $349 billion would mature in 2019, the largest amount ever to mature in a single year.

But Moody’s pointed out that “near term risk remains low as only $18 billion, or 2% of total speculative-grade issuance comes due in 2015.” And that’s how it played out last year.

Since then, the refinancing cliff has gotten a lot bigger, according to Moody’s new annual report. The amount in junk-rated debt to be refinanced over the next five years, from 2016 through 2020, has surged nearly 20% to a record of $947 billion.

This is an increasingly steep cliff, with the largest portions due in the later years of the period, including $400 billion to mature in 2020, the highest amount of rated debt ever to mature in one year.

And near term? Moody’s Senior Analyst Tiina Siilaberg warned that there would be “a significant wave of new issuance in late 2016 and 2017.” At the worst possible time – because “a range of macroeconomic factors will make it more difficult for lower-rated companies to tap the debt capital markets in order to refinance their debt obligations.”

One of those macroeconomic factors is the spread between yields of these lower-rated junk bonds and Treasuries, which has totally blown out. For debt rated CCC/Caa1 or lower, the average spread has shot to over 20%, where it had been on October 6, 2008, right after the post-Lehman panic. And yields for these bonds have soared to over 21% on average.

Among the other macroeconomic factors, Moody’s lists the slowdown in China and volatility in oil prices. And there’s another factor that will “make it more difficult for lower-rated companies to refinance”: worried regulators have been cracking down on banks’ exposure to leveraged loans, which are so risky that even the Fed has been fingering them publicly.

Banks sell these leveraged loans to loan mutual funds or repackage them into collateralized loan obligations (CLOs) which they then sell in tranches to institutional investors. When leveraged loans mature, companies have to come up with the money, but Moody’s warns that “rising defaults and the impact of the Dodd-Frank Act’s risk retention rule will make it more difficult for existing CLOs to supply corporate financing.”

This leaves Moody’s refinancing index, which measures if there’s sufficient liquidity in the credit markets to deal with the refinancing cliff, at “2009 levels,” which indicates “that the refinancing conditions are weaker than normal,” said Moody’s in its laconic manner.

And the refinancing cliff is getting bigger: In the current downgrade tango, companies at the lower levels of investment grade are getting downgraded one or two notches and end up with a junk credit rating, thus increasing the total amount of junk-rated debt that needs to be refinanced over the next five years beyond the $947 billion.

The telecommunications, technology, and media sectors are weighed down by the highest debt burden. But as energy companies and much of the remaining commodities sector have gotten run over by the commodities rout, their credit profiles have sharply deteriorated. And a number of these companies at the lower levels of investment-grade will likely be downgraded into junk.

For example, energy companies that Moody’s still rates Baa3, so one notch above junk, have $34 billion in debt maturing over the next five years. “But there is a high risk that investment-grade issuers in these sectors will be lowered to speculative-grade,” Moody’s said.

This trend has been playing out in Moody’s Liquidity Stress Index, where the energy sector continues to fuel liquidity downgrades and defaults. These companies are already grappling with cash flow constraints, and they will be tapping the markets just as increased regulation and slowing growth in China make the credit markets more risk-averse.

But it’s not limited to energy and commodities. Other companies in sectors like brick-and-mortar retail, restaurants, or telecommunications (Sprint is the biggie here) are heading down the same path toward the cliff. And when these companies can’t refinance their maturing debts, they go over the cliff – or rather their stockholders and creditors will go over the cliff.

So it’s not contained. Read…  This is How Financial Chaos Begins

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falak pema's picture

what happened to the testosterone pit?

Thats more in keeping with the contents of this artice.

All these debt junkies in the debt pit need moar testo toxic juice!

CrazyCooter's picture

Wolf re-branded "Testosterone Pit" to "Wolf Street" - not much changed other than the name - as far as I see it anyway. ZH updated the left nav link a while back as well.

MISH changed his site recently too, but the left nav hasn't updated yet.

Turd Fergusen did the same a while back as well.

Bloggers just trying to manager their sites as they grow and change.



ShreysFinanceBlog's picture
ShreysFinanceBlog (not verified) Feb 18, 2016 4:34 AM

Thanks for this article regarding the refinancing cliff that junk companies now have to face; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic article.

Dr. Spin's picture

Hey Shrey,

Welcome to fight club.  At 15 you are a bit young for this rough and tumble world.  The great beauty of undiluted expression is that the truth can winnowed from the chaff.  Just understand that when you post here, you will be given no quarter.  In fight club, we eat our young.  ;-) 

That being said, you will learn a lot here.  Make good use of the time, for in absolute reality, time is the currency of life and how you spend it defines your existence.

Welcome aboard,

Spcotor Din

Diplodicus Rex's picture

Ahem, you do realise you're talking to a bot I take it?

Dr. Spin's picture

Maybe yes, maybe no.  We should encourage the youth...

I teach at a Liberal Arts University,,,


ebworthen's picture

Solid stuff Wolf, as usual.

Glad I don't own Sprint.

Dragon HAwk's picture

A Rolling stone gathers no Moss, that is unless it hits a great big Ditch...

WhackoWarner's picture

This is all directly rleated to imports of rape.  And breakdown of society.


There is something very wrong going on here.  it involves greed and ignornace.


It involves male dominated thought. religion of penance. guilt and a descent into serfdom.


There is something happening here Mr. Jones.


And some people see through it but not most. So we go down this idiot, raping and robbing path whereby all wealth on this planet is given over to the "entitled". Welcome folks to serfdom again. (slaves were too expensive).


Gavrikon's picture

"It involves Jew dominated thought. religion of penance (pussified christianity). resulting in guilt and a descent into serfdom."

kenny500c's picture

Central Banks to the rescue, they will not allow wholesale bankruptcies.

steelhead23's picture

I think Wolf is about to drop the other shoe.  This debt crisis isn't just about looming bankruptcies among the indebted, its about looming bankruptcies among institutional investors and the big banks.  And as Mr. Kashkari has clearly stated, those institutions remain TBTF and the CBs will do whatever necessary to prevent massive failure.  Hence, Kenny is right.  The CBs are powerless to prevent the bankruptcies of the debtors but will work to preserve the lenders.

KnuckleDragger-X's picture

I don't think they can stop it, but that doesn't mean the won't try. The way it's set up, the bail outs would need to come from the mega-banks, but most of them are starting to have that bent over and reamed feeling, and more money would only mean an even bigger collapse later.......

MalteseFalcon's picture

This is the liquidation of inefficient, non-economic "enterprises".

It is a clear sign the economy is healing.

Over the cliff, you goddamned lemmings.

. . . _ _ _ . . .'s picture

Doesn't this simply imply that capitalism is a road towards monopoly, and doesn't that engender political ramifications of tyranny, as well? Is this aspect expected to be self-regulating, or will they all, someday, merge into one?

“[...] a range of macroeconomic factors will make it more difficult for lower-rated companies to tap the debt capital markets in order to refinance their debt obligations."

This bottleneck is the problem; is it the driving force towards the complete loss of liberty and pure fascistic communism? Combined with M&A, it leads to an all-encompassing global monopoly for which everybody works. That is the evolution which was worked into the system from the very start. "Network" got it right, for the most part. The bigger the big boys get, or so the theory goes, the better, though every system has its limits.

It's like sharpening a pencil, if governments  turn it one way, it's communism, if the people turn it the other way, it's democratic. Either way, it keeps getting more and more pointed, until there is no room for growth or dissent. This implies that economies like societies are finite, as population tends to control itself, eventually, through famine or war; it needs no help either way.

*I might be overstating, for the sake of argument.*

new game's picture

barriers to entry are higher than ever. the lobbiests have had field day buying influence and getting laws passed to ensure tbtf becomes monoplies that funnel ever moar cash to the ruling class. great returns for small investments...

try opening a business and tell me how it goes. compliance is the new word for fuck it...