Capital Markets

Junk Refunding Rate Slowing Down

Refunding risk for bank loans is faring better than for bonds, Moody's reports.
Stephen TaubFebruary 14, 2007

The amount of speculative-grade U.S. corporate debt to be refunded over the next three years has fallen, but the credit quality of bank loans is faring better than bonds, reported Moody’s Investors Service.

According to Moody’s, a total of about $82 billion in speculative-grade corporate bonds and credit facilities will mature between 2007 and 2009, including $48 billion in bonds and $34 million in credit facilities. A year ago, that total stood at $91 million, $62 billion in bonds and $29 billion in credit facilities.

In a statement, Moody’s Senior Vice President Kendra Smith attributed the reduction in refunding to “substantial” liquidity in the U.S. high-yield markets. “Receptivity for new corporate issuances is being fueled by a significant amount of leveraged buyouts, tight credit spreads, a favorable interest rate environment, and low corporate default rates for speculative-grade issuers,” she added. These trends should remain robust throughout 2007, Smith also asserted, given the number of mergers and acquisitions announced in recent months.

The credit-ratings agency also observed, however, that refunding risk for Moody’s-rated U.S. bonds has increased. Of the bonds to be refunded in the next three years, 61 percent have a rating of B1 or below, compared with 56 percent one year ago.

On the other hand, for speculative-grade bank debt over that same period, the refunding risk is “fairly low”: 73 percent is rated Ba3 or higher. Bank loans are also playing a larger role, according to Moody’s; they now comprise 41 percent of the debt to be refinanced over the next three years, up from 32 percent last year.