It's Time for a Credit 'Temperature Check'

Editor's note: We've seen a historic reduction in short-term "junk" debt coming due this year. But according to Rob Spivey – director of research at our corporate affiliate Altimetry – this debt hasn't been taken care of... It's just being pushed out. In this piece, recently shared in the free Altimetry Daily Authority e-letter, he explains why investors should watch this trend closely – even if a recession may not show up in the near future...

Anyone watching the corporate-debt landscape got a big surprise back in April...

When the Federal Reserve kept interest rates high back then, we expected borrowing to slow way down. Companies should have been scared to refinance.

But instead, the opposite happened. Companies started to borrow more. And in doing so, they slashed their near-term debt maturities... pushing them further into the future via refinancing, thereby making the debt landscape far less intimidating.

Now, the fourth quarter of 2024 has just started. Creditors are taking swift measures to protect themselves from potential bankruptcies. So they're getting more concerned about debt again.

Not to mention, the Federal Reserve cut interest rates last month. That suggests the central bank is getting concerned about the economy cooling off. And the last thing you want when the economy starts struggling is a credit crisis.

With so many changes to the economic landscape, it's high time for a "temperature check."

So today, we'll discuss how refinancing activities have evolved since the start of the year... and how these changes impact credit risk.

You can't have a wave of bankruptcies without looming debt maturities...

And according to Bloomberg, those maturities are still being pushed out.

As of August, nonfinancial companies with at least one "junk" rating had already refinanced or paid off more than $170 billion worth of junk bonds due over the following two years. That's more than any full year – ever.

It even exceeds the amount repaid throughout all of 2021, when refinancing activities surged due to exceptionally low interest rates.

Take a look...

As you can see, the next two years' worth of huge debt headwalls are melting away. That makes it a lot harder to enter a debt crisis... considering there's far less debt coming due soon.

In short, 2024 has been the year of high-yield debt...

Corporations have issued more than $350 billion worth of high-yield bonds this year, the largest bond issuance since the pandemic. And we still have three months to go.

High demand from investors has fueled the surge. And for companies that struggled to access the regular debt market, the $1.7 trillion private-credit market made it easier than ever to refinance.

Without a credit crunch, we're safe from a sudden recession threat or a wave of bankruptcies for now.

But the companies that refinanced didn't take care of their debt. They just delayed it by a few years.

While we've softened the risk of a recession, we haven't eliminated it...

A downturn probably isn't this year's problem, or even next year's. And as long as companies keep finding ways to delay their debt maturities, the economy will likely keep chugging along.

The Fed's initial 50-basis-point cut on September 18 means more attractive refinancing opportunities. Companies should be able to keep refinancing in the coming quarters.

But before they can completely eliminate the risk of a serious recession, they still have a lot more debt to deal with.

Credit risk is cooling down for the moment. However, companies can't push those headwalls out forever. Watch closely how refinancing activity unfolds for the rest of the year.

Regards,

Rob Spivey

Editor's note: Investors, economists, and even policymakers have been paralyzed by economic uncertainty all year. That's why Joel Litman, founder of our corporate affiliate Altimetry, is stepping forward with his one-step plan to help you navigate what lies ahead...

It's the same strategy that resulted in triple-digit gains for his business partner's hedge fund in 2008... even as the overall market crashed 50%. Learn how to position yourself to win in the markets today – no matter what happens next in stocks – right here.