Analysis from ratings agency Fitch indicates problems in the debt markets will cause significant problems for junk rated companies in need of refinancing over the next few years.
The report ”Loan Issuance Boom Shifts Refinancing Risk Strongly to Loan Markets” argued the volume of loans due over the next several years towers over the volume of maturing bonds. Therefore “the ability of speculative grade borrowers to roll over maturing loans will be critical.”
A third of leveraged loans or $473 billion mature between 2008 and 2010, while half or $680 billion mature by 2011. Half of the debt maturing between 2008 and 2010 is rated ‘B+’ and below ,while 25 percent is rated single B and below.
“Many highly leveraged firms rely on their ability to roll over existing loan debt rather than repay it at maturity; something they often lack the financial resources to do. In fact, for the riskier borrowers, the ability to tap the loan market for liquidity can be of significant importance in maintaining solvency and avoiding default,” Fitch said.
The percentage of non-bank institutional issuers such hedge funds and CLOs had risen dramatically in recent years up to 73 percent for leveraged loan issuance and 70 percent for leveraged loan refinancing from 60 percent and 50 percent respectively.
Problems in the worldwide debt markets stemming from the US sub-prime crisis have led to a dramatic crash in lending capacity. The pulled syndications of the Chrysler and Alliance Boots deals especially, have emphasised banks are finding it extremely difficult to sell on the current pipeline of debt for the year, which is estimated to be above $300 million in the US alone.