Refunding Risk: Another Blow for Markets

Moody's warns that deterioration for junk bonds and bank facilities outweighs the slight improvement in last year's ratings.
Stephen TaubMarch 4, 2008

As if the shaky credit markets needed something else to worry about.

Moody’s Investors Service warned that the overall refunding risk is high for speculative-grade bonds and bank credit facilities, as volatile capital market conditions outweigh the slight improvements that have been recorded in ratings over the last year.

“The ongoing market and financial pressure, including the heightened potential for covenant violations, trumps the apparent ebb in
speculative-grade companies’ refinancing needs,” said Kevin Cassidy, Moody’s vice president/senior credit officer, in a new report addressing refunding in general.

According to the report, 300 speculative-grade corporate issuers tracked by Moody’s need to refund $86 billion in credit facilities and corporate bonds scheduled to mature between 2008 and 2010.

This includes $13 billion in 2008, $28 billion in 2009, and $45 billion in 2010.

The dollar amount of speculative-grade debt to be refinanced during the three-year period ending in 2010 is slightly higher than the amount reported in last year’s refunding study.

However, it is lower than the amount reported in Moody’s 2004, 2005 and 2006 refunding studies.

For the 2008-2010 period, Moody’s also determined that refunding needs have shifted toward bank credit facilities from bonds, reflecting the recent low interest rate period during which the leveraged loan
market grew rapidly.

The surge in refunding figures to come at the same time that the default rate surges.

Moody’s estimates that the speculative-grade default rate will rise more than fivefold, to 5.3 percent by the end of 2008 from 0.9 percent in 2007, which was the lowest it had been since 1981 when the default rate stood at 0.7 percent.