Laura Achiro and Neha Bora
Central banks in most superior economies have tightened financial coverage by elevating rates of interest. Tighter financing circumstances might make it more durable for some companies to refinance their debt or might imply they face much less beneficial phrases once they do. This weblog explores the extent to which bond maturities might crystallise these refinancing dangers. General, UK company bond issuers seem broadly resilient to larger financing prices, however dangers are larger for riskier debtors significantly if the macroeconomic outlook and funding circumstances had been to deteriorate.
What’s refinancing threat?
Paul and Zhou (2018) outline refinancing threat because the potential lack of ability of a borrower to safe new financing to switch current debt coming due. Refinancing of bond debt is vital because the UK company funding panorama has materially developed for the reason that late 2000s with firms lowering their dependence on financial institution borrowing and growing their use of market-based finance (MBF). The share of bond finance to total UK company debt has elevated to 33% at this time, in comparison with the 22% share at end-2008.
We use a bottom-up information set to scale the extent of refinancing threat within the quick (two-year) and medium time period (five-year horizon). Our information set is constructed from matching issuance-level market information with firm accounts information throughout a given group’s possession construction. This method gives a breadth of knowledge together with the UK bond issuer’s total credit score profile via a fuller mapping of the UK domiciled group and of the financing entities inside that group, extra up-to-date data on bond tenors after accounting for bond occasions (eg, known as bonds forward of maturity).
How giant are bond refinancing dangers in mixture?
Round 15% of UK company bonds mature throughout the subsequent two years (Chart 1). That is consistent with current historic averages, and barely beneath the extent prevailing earlier than the worldwide monetary disaster (GFC). The image is comparable on the five-year horizon, with round 40% of bonds maturing – consistent with current historic averages. That is partly as a result of the pre-GFC interval was characterised by relaxed lending requirements, and extreme leverage ranges. Nonetheless, in subsequent years, classes realized from the monetary disaster have paved the best way for advances in threat administration and extra cautious lending practices.
Chart 1: Debt-weighted share of refinancing wants for UK PNFC bonds (a)
Sources: LSEG and employees calculations.
(a) The overall UK PNFC bonds proven on this chart excludes non-rated and withdrawn bonds.
How rather more susceptible are riskier issuers?
Dangers seem considerably bigger for high-yield bond issuers. These bonds comprise round £59 billion (17%) of our £352 billion information set which excludes non-rated and withdrawn bonds. These issuers are largely at a better threat of default, and that is mirrored in a better value of funding.
For the riskier subset of high-yield debtors, the proportion of bonds maturing inside two years is barely above historic averages and GFC ranges (Chart 2). Equally, the proportion maturing inside 5 years can also be above pre-GFC ranges.
The latest information present a rise in bonds maturing throughout each time horizons. Typically, corporates sometimes don’t wait till a bond matures to refinance it; they are going to search to refinance forward of maturity to make sure that they’ve continuity of funding. Nonetheless, with tighter market circumstances, resembling larger rates of interest, larger credit score spreads and diminished investor urge for food for riskier debt, corporates might discover it tough to safe beneficial phrases to refinance current debt or debt coming due. This may increasingly result in corporates selecting to delay refinancing till nearer to the maturity date of their bonds.
Chart 2: Debt-weighted share of refinancing wants for high-yield UK PNFC bonds (a)
Sources: LSEG and employees calculations.
(a) The overall UK PNFC high-yield bonds proven on this chart excludes non-rated and withdrawn bonds.
Charts 3a and 3b present the forward-looking maturity profiles for investment-grade bonds and high-yield bonds issued by UK personal non-financial firms (PNFCs). It’s fascinating that the bars for each investment-grade and high-yield bonds are very comparable sized throughout years.
Much less reassuring although, round 57% of excellent investment-grade bonds are rated BBB that means {that a} one notch downgrade might cut back their score to excessive yield. This might lead some traders to promote their holdings, for instance if their mandate prevents them holding high-yield bonds. And this promoting stress might push bond costs down, past ranges in keeping with the downgrade information.
Chart 3a: Ahead-looking maturity wall for UK investment-grade PNFC bonds (a)
Sources: LSEG and employees calculations.
(a) The overall UK PNFC investment-grade bonds proven on this chart excludes non-rated and withdrawn bonds.
Inside the inhabitants of excellent high-yield bonds maturing between 2024 and by 2028, the overwhelming majority are rated both BB (12%) or B (4%), and just one% of the excellent inventory of UK company bonds falls into the riskiest bucket rated CCC or beneath (Chart 3b). Whereas we’d take consolation within the cohort of the riskiest bonds being comparatively low, the development in bond maturity reinforces dangers round a susceptible tail of corporates that want monitoring.
Chart 3b: Ahead-looking maturity wall for UK high-yield PNFC bonds (a)
Sources: LSEG and employees calculations.
(a) The overall UK PNFC high-yield bonds proven on this chart excludes non-rated and withdrawn bonds.
How rather more costly is bond issuance at this time?
To supply context, we use a hypothetical illustration the place we see the everyday issuance value of high-yield bonds has elevated to 10.25% (Financial institution Fee of 5.25% as at December 2023 plus high-yield OIS unfold of 5%). The common tenor of a UK company bond is 10 years, so for comparability functions we have a look at the price of issuing a bond 10 years in the past in December 2013. We discover that the associated fee has greater than doubled from 4.9% in 2013 (Financial institution Fee of 0.5% as at December 2013 plus high-yield OIS unfold of 4.4%). Furthermore, not way back in 2021, high-yield bond issuers had been paying even much less, with issuance prices averaging 4.1% (Financial institution Fee of 0.25% as at December 2021 plus high-yield OIS unfold of three.9%).
Likewise, the present value of issuing an investment-grade company bond has additionally elevated to six.72% (base charge of 5.25% plus investment-grade OIS unfold of 1.47%) in December 2023. This represents a rise of 547 foundation factors since 2021 however stays considerably decrease than the price of issuing a high-yield bond. A company that’s downgraded from BBB (funding grade) to excessive yield would due to this fact face a pointy improve in issuance prices.
What levers can corporates pull to mitigate refinancing dangers?
Along with official rates of interest, the extent of company bond spreads is a key determinant of the price of refinancing. Latest information exhibits a downtick in company bond spreads because the yield premium over authorities bonds decreases (Chart 4). The autumn in spreads for the high-yield bonds (purple line) is way sharper than for investment-grade bonds (pink line in Chart 4). Corporates may select to make the most of this and refinance their debt early whereas spreads are comparatively low to lock them in. Or they could select to attend within the hope that official rates of interest fall. Doing so might show dangerous, as earlier episodes, together with the GFC, present that bond spreads can improve considerably if the financial system or monetary markets expertise stress.
Chart 4: Company bond spreads
Sources: ICE BofA Sterling Excessive Yield Index (Ticker: HL00) and ICE BofA Sterling Industrial Index (Ticker: UI00).
Corporates might additionally select to repay debt with money reserves quite than refinance it. Chart 5 exhibits that UK corporates have wholesome money reserves in comparison with the GFC interval. On the mixture stage, UK company holdings of liquid property have been on an total upwards development and elevated by practically £180 billion since 2019 to round £786 billion in 2023 Q3 (Chart 5). This build-up in liquid property has been supported by sturdy development in nominal earnings for the reason that pandemic. This has diminished the combination internet debt to earnings of UK corporates to a historic low of 119% (Chart 5).
Alternatively, corporates might select to deleverage, or take different defensive actions resembling lowering employment and funding which might cut back financial development. To date, UK corporates have diminished their inventory of excellent bonds by 6% since December 2021 when the Financial institution Fee was first raised by the Financial Coverage Committee.
Chart 5: Liquid asset holdings by PNFCs
Sources: Affiliation of British Insurers, Financial institution of England, Bayes CRE Lending Report (Bayes Enterprise College (previously Cass)), Deloitte, Finance and Leasing Affiliation, agency public disclosures, Integer Advisors estimates, LCD an providing of S&P International Market Intelligence, London Inventory Trade, ONS, Peer-to-Peer Finance Affiliation, LSEG and Financial institution calculations.
Summing up
General, our evaluation helps the Monetary Coverage Committee’s evaluation in its newest Monetary Stability Report that UK companies are anticipated to be resilient total to larger rates of interest and weak development. However that some companies are more likely to wrestle extra with borrowing prices, together with companies in components of the financial system most uncovered to a slowdown, or with a considerable amount of debt. We discover that dangers are extra elevated for high-yield bond debtors, significantly on the five-year horizon.
Laura Achiro and Neha Bora work within the Financial institution’s Macro-Monetary Dangers Division.
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