American Consequences - December 2019

Then in 2018, something changed. The refinancing market dried up. Companies weren’t as active refinancing their debts. The cost for them to do so had risen significantly... First, the Federal Reserve was actively hiking interest rates, with four rate increases in 2018. And the underlying CDSs for corporate borrowers were rising too as perceptions grew that the bull market was running out of steam. The cost to borrow for IG companies rose from around 2% to 3.5% in 2018 through early 2019. The cost to borrow for HY businesses jumped from 3.5% to 5.5%. Companies saw these increases and paused their debt refinancings. That’s how the debt-maturity headwall in 2021 got so big earlier this year. But in recent months, we’ve seen a big inflection... which has caused the refinancing market to return. It’s why we think debt- maturity headwalls that had been looking material for 2021 are likely to be pushed out to 2022 and beyond.

The chart below highlights the cost to borrow for U.S. corporations currently, which we look at by combining aggregate credit default swap (“CDS”) prices plus the risk-free rate over the last decade. Credits are broken into three buckets: investment grade (“IG”), crossover (“XO”), and high yield (“HY”). IG companies are the largest, safest, and most stable public companies, while HY companies are the smallest and riskiest. So it makes sense that HY corporate cost to borrow is always more expensive than IG cost to borrow, with XO always in the middle. As you can see in the chart below, the cost to borrow for all types of credit is significantly lower than it was in 2010 as we were coming out of the Great Recession. Companies have used those lower costs to consistently refinance their debt maturities. It made sense. When companies “roll out” their debt this way, they get to delay repaying it and also get to see interest expenses decline or, at worst, stay flat.

12%

Altimetry Custom Aggregate CDS Index with RFR

8%

4%

Investement Grade Crossover High Yield

Source: Altimetry

0%

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American Consequences

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