by J.P. Morgan Asset Management for Iris.xyz
The U.S corporate debt market has had a solid start to the year, with U.S. Investment Grade (IG) bonds up 2.7% and U.S. High Yield up 5.4%. Looking ahead, however, investors will be faced with a wave of maturing bonds, also known as a maturity wall. As we highlight in this week’s chart, the next four years will see $4.7 trillion of bonds mature across both IG and speculative-grade debt markets.
Investors worry about overcoming large maturity walls when interest rates are rising, as companies are forced to roll over and refinance their debt at higher interest rates. The challenge for U.S corporations is that these higher interest rates take a toll on corporate financials. The interest coverage ratio, or the number of times a company’s earnings can cover its interest expenses, fell from 8.6x in 2012 to 7.3x in 2018, close to the lowest level since 2009. The concern is that defaults could begin to rise as firms are unable to refinance maturing debt at these higher rates of interest.
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The good news is that investors are continuing the hunt for yield. 27% of global government debt has a yield below 0%, which has created natural demand for corporate bonds and helped keep interest rates low. The combination of these two factors should help ease the pressures of the approaching maturity wall, but investors should remain cautious given where we are in the cycle. Last year, 87% of high yield and leveraged loan debt issuance was considered to be covenant-lite, meaning that it had little to no protection for bond holders. As maturing debt is rolled forward investors may be wise to look for those issues that have more protection for bond holders, even if that means sacrificing some additional yield.