Laura Achiro and Neha Bora
Central banks in most superior economies have tightened financial coverage by elevating rates of interest. Tighter financing circumstances could make it more durable for some companies to refinance their debt or may imply they face much less beneficial phrases after they do. This weblog explores the extent to which bond maturities may crystallise these refinancing dangers. General, UK company bond issuers seem broadly resilient to larger financing prices, however dangers are larger for riskier debtors notably if the macroeconomic outlook and funding circumstances have been to deteriorate.
What’s refinancing threat?
Paul and Zhou (2018) outline refinancing threat because the potential incapacity of a borrower to safe new financing to interchange present debt coming due. Refinancing of bond debt is vital because the UK company funding panorama has materially developed because the late 2000s with corporations decreasing their dependence on financial institution borrowing and growing their use of market-based finance (MBF). The share of bond finance to total UK company debt has elevated to 33% at the moment, in comparison with the 22% share at end-2008.
We use a bottom-up knowledge set to scale the extent of refinancing threat within the brief (two-year) and medium time period (five-year horizon). Our knowledge set is constructed from matching issuance-level market knowledge with firm accounts knowledge throughout a given group’s possession construction. This method offers a breadth of knowledge together with the UK bond issuer’s total credit score profile by a fuller mapping of the UK domiciled group and of the financing entities inside that group, extra up-to-date data on bond tenors after accounting for bond occasions (eg, referred to as bonds forward of maturity).
How massive are bond refinancing dangers in mixture?
Round 15% of UK company bonds mature throughout the subsequent two years (Chart 1). That is in keeping with latest historic averages, and barely beneath the extent prevailing earlier than the worldwide monetary disaster (GFC). The image is analogous on the five-year horizon, with round 40% of bonds maturing – in keeping with latest historic averages. That is partially as a result of the pre-GFC interval was characterised by relaxed lending requirements, and extreme leverage ranges. Nonetheless, in subsequent years, classes discovered from the monetary disaster have paved the best way for advances in threat administration and extra cautious lending practices.
Chart 1: Debt-weighted share of refinancing wants for UK PNFC bonds (a)
Sources: LSEG and employees calculations.
(a) The whole UK PNFC bonds proven on this chart excludes non-rated and withdrawn bonds.
How rather more weak are riskier issuers?
Dangers seem considerably bigger for high-yield bond issuers. These bonds comprise round £59 billion (17%) of our £352 billion knowledge set which excludes non-rated and withdrawn bonds. These issuers are largely at the next threat of default, and that is mirrored in the next price of funding.
For the riskier subset of high-yield debtors, the proportion of bonds maturing inside two years is barely above historic averages and GFC ranges (Chart 2). Equally, the proportion maturing inside 5 years can be above pre-GFC ranges.
The newest knowledge present a rise in bonds maturing throughout each time horizons. Typically, corporates sometimes don’t wait till a bond matures to refinance it; they may search to refinance forward of maturity to make sure that they’ve continuity of funding. Nonetheless, with tighter market circumstances, corresponding to larger rates of interest, larger credit score spreads and diminished investor urge for food for riskier debt, corporates could discover it troublesome to safe beneficial phrases to refinance present debt or debt coming due. This may increasingly result in corporates selecting to delay refinancing till nearer to the maturity date of their bonds.
Chart 2: Debt-weighted share of refinancing wants for high-yield UK PNFC bonds (a)
Sources: LSEG and employees calculations.
(a) The whole UK PNFC high-yield bonds proven on this chart excludes non-rated and withdrawn bonds.
Charts 3a and 3b present the forward-looking maturity profiles for investment-grade bonds and high-yield bonds issued by UK personal non-financial firms (PNFCs). It’s attention-grabbing that the bars for each investment-grade and high-yield bonds are very comparable sized throughout years.
Much less reassuring although, round 57% of excellent investment-grade bonds are rated BBB that means {that a} one notch downgrade may cut back their ranking to excessive yield. This might lead some buyers to promote their holdings, for instance if their mandate prevents them holding high-yield bonds. And this promoting strain may push bond costs down, past ranges in step with the downgrade information.
Chart 3a: Ahead-looking maturity wall for UK investment-grade PNFC bonds (a)
Sources: LSEG and employees calculations.
(a) The whole UK PNFC investment-grade bonds proven on this chart excludes non-rated and withdrawn bonds.
Throughout the inhabitants of excellent high-yield bonds maturing between 2024 and by 2028, the overwhelming majority are rated both BB (12%) or B (4%), and only one% of the excellent inventory of UK company bonds falls into the riskiest bucket rated CCC or beneath (Chart 3b). Whereas we’d take consolation within the cohort of the riskiest bonds being comparatively low, the development in bond maturity reinforces dangers round a weak tail of corporates that want monitoring.
Chart 3b: Ahead-looking maturity wall for UK high-yield PNFC bonds (a)
Sources: LSEG and employees calculations.
(a) The whole UK PNFC high-yield bonds proven on this chart excludes non-rated and withdrawn bonds.
How rather more costly is bond issuance at the moment?
To offer context, we use a hypothetical illustration the place we see the standard issuance price of high-yield bonds has elevated to 10.25% (Financial institution Charge of 5.25% as at December 2023 plus high-yield OIS unfold of 5%). The common tenor of a UK company bond is 10 years, so for comparability functions we have a look at the price of issuing a bond 10 years in the past in December 2013. We discover that the price has greater than doubled from 4.9% in 2013 (Financial institution Charge of 0.5% as at December 2013 plus high-yield OIS unfold of 4.4%). Furthermore, not way back in 2021, high-yield bond issuers have been paying even much less, with issuance prices averaging 4.1% (Financial institution Charge of 0.25% as at December 2021 plus high-yield OIS unfold of three.9%).
Likewise, the present price of issuing an investment-grade company bond has additionally elevated to six.72% (base price of 5.25% plus investment-grade OIS unfold of 1.47%) in December 2023. This represents a rise of 547 foundation factors since 2021 however stays considerably decrease than the price of issuing a high-yield bond. A company that’s downgraded from BBB (funding grade) to excessive yield would subsequently face a pointy improve in issuance prices.
What levers can corporates pull to mitigate refinancing dangers?
Along with official rates of interest, the extent of company bond spreads is a key determinant of the price of refinancing. Current knowledge exhibits a downtick in company bond spreads because the yield premium over authorities bonds decreases (Chart 4). The autumn in spreads for the high-yield bonds (purple line) is way sharper than for investment-grade bonds (pink line in Chart 4). Corporates may select to reap the benefits of this and refinance their debt early whereas spreads are comparatively low to lock them in. Or they could select to attend within the hope that official rates of interest fall. Doing so may show dangerous, as earlier episodes, together with the GFC, present that bond spreads can improve considerably if the economic system or monetary markets expertise stress.
Chart 4: Company bond spreads
Sources: ICE BofA Sterling Excessive Yield Index (Ticker: HL00) and ICE BofA Sterling Industrial Index (Ticker: UI00).
Corporates may additionally select to repay debt with money reserves fairly than refinance it. Chart 5 exhibits that UK corporates have wholesome money reserves in comparison with the GFC interval. On the mixture degree, UK company holdings of liquid property have been on an total upwards development and elevated by practically £180 billion since 2019 to round £786 billion in 2023 Q3 (Chart 5). This build-up in liquid property has been supported by strong progress in nominal earnings because the pandemic. This has diminished the combination web debt to earnings of UK corporates to a historic low of 119% (Chart 5).
Alternatively, corporates could select to deleverage, or take different defensive actions corresponding to decreasing employment and funding which may cut back financial progress. To this point, UK corporates have diminished their inventory of excellent bonds by 6% since December 2021 when the Financial institution Charge was first raised by the Financial Coverage Committee.
Chart 5: Liquid asset holdings by PNFCs
Sources: Affiliation of British Insurers, Financial institution of England, Bayes CRE Lending Report (Bayes Enterprise Faculty (previously Cass)), Deloitte, Finance and Leasing Affiliation, agency public disclosures, Integer Advisors estimates, LCD an providing of S&P International Market Intelligence, London Inventory Alternate, ONS, Peer-to-Peer Finance Affiliation, LSEG and Financial institution calculations.
Summing up
General, our evaluation helps the Monetary Coverage Committee’s evaluation in its newest Monetary Stability Report that UK companies are anticipated to be resilient total to larger rates of interest and weak progress. However that some companies are more likely to wrestle extra with borrowing prices, together with companies in components of the economic system most uncovered to a slowdown, or with a considerable amount of debt. We discover that dangers are extra elevated for high-yield bond debtors, notably on the five-year horizon.
Laura Achiro and Neha Bora work within the Financial institution’s Macro-Monetary Dangers Division.
If you wish to get in contact, please e-mail us at bankunderground@bankofengland.co.uk or depart a remark beneath.
Feedback will solely seem as soon as accepted by a moderator, and are solely printed the place a full title is equipped. Financial institution Underground is a weblog for Financial institution of England employees to share views that problem – or help – prevailing coverage orthodoxies. The views expressed listed below are these of the authors, and should not essentially these of the Financial institution of England, or its coverage committees.
Share the submit “How resilient are UK company bond issuers to refinancing dangers?”
