Cash Management

Will Your Company Refinance?

Over the next two years, S&P predicts companies will refinance an aggregate $700 billion in current debt, especially if interest rates remain flat.
Stephen TaubFebruary 27, 2007

U.S. corporate bond issuance is expected to be very strong in 2007 and 2008, driven in large part by substantial refunding of maturing and callable debt. Standard & Poor’s Ratings Services estimates that there was a total of $3.1 trillion in outstanding debt on December 31, 2006.

Of that sum, $328 billion of financial and non-financial company debt is likely to be refunded in 2007, with an additional $365 billion due in 2008, according to a new detailed report released by S&P. All together, the credit rating agency expects refunding activity in 2007 to average $27 billion per month, while gross issuance is expected to come in at $83 billion per month.

In 2008, gross issuance will likely drop to about $70 billion to $75 billion per month. However, refunding needs will be fairly steady at $30 billion per month, notes the report. In other words, monthly net bond supply—which is calculated as gross issuance less refunding—should average out to $55 billion in 2007, and decline to $40 billion to $45 billion per month in 2008.

S&P explains that it arrived at these figures by examining maturing debt schedules of both fixed-rate (including zero-coupon issues) and floating-rate debt, as well as from firms exercising embedded call provisions on fixed-coupon debt. The report assumes that all maturing and called debt will need to be refinanced.

The bulk of the refunding amounts should be linked to $275 billion of maturing debt in 2007, and $314 billion in 2008. Floating-rate maturities will probably amount to 44 percent in 2007, and 36 percent in 2008.

S&P says it expects that call provisions—which exist on about 12 percent of fixed-rate debt—will be exercised on $53 billion worth of corporate bonds in 2007, and another $51 billion in 2008. “Call projections depend on the slope and absolute level of the yield curve, both of which are forecasted to be a mild call deterrent,” add the report authors.

Many of S&P’s assumptions are based on its expectations that the 10-year Treasury yield will climb slightly to 5.05 percent in 2007 and 5.40 percent in 2008. Nevertheless, the debt rater expects the three-month Treasury bill rate to decline to 4.4 percent in 2008, as S&P officials expect the Fed to cut rates starting in late 2007.

“Low interest rates and low interest rate volatility should continue to provide a favorable refinancing environment in 2007, but we perceive upside rate risks,” S&P warns in the report. Indeed, if rates climb above its baseline forecast, call volumes would fall by about 12 percent to 15 percent, it adds.

From a credit standpoint, S&P figures investment-grade refunding should look strong at $259 billion in 2007 and $298 billion in 2008. It expects refunding of junk debt to amount to $69 billion in 2007, and $67 billion in 2008.

From an industry standpoint, financial institutions and industrials will dominate the redemption calendar. S&P does concede, however, that not all maturing debt will be refinanced. It asserts many companies may choose to retire debt, as corporate balance sheets look fairly liquid. “Conversely, debt-financed equity buybacks and M&A activity should keep the issuance pipeline strong,” it adds.