Despite the disruption caused by COVID-19, the risk of a debt “maturity wall,” similar to the one that followed the 2008 global financial crisis, does not appear to be of particular concern to credit markets.
After adopting a wait-and-see approach in H1 2020 and concentrating on credits facing imminent maturity, lenders across all global markets showed a strong appetite for new deals for the right credits in subsequent months. By H2 2020, refinancing activity had rebounded, as lenders sought opportunities to deploy capital.
High yield bond and leveraged loan issuance for refinancing purposes in North America and Southern and Western Europe, for example, climbed from US$680.9 billion in 2019 to US$710.3 billion in 2020.
In APAC (excl. Japan), the issuance of high yield bonds, leveraged loans and non-leveraged loans for refinancings in 2020 came in at US$276.4 billion. While this was down from the 2019 figure of US$323.2 billion, it still represented the second highest year for refinancing in the region since 2015.
The combination of low interest rates globally, insolvency moratoria in certain jurisdictions and aggressive monetary stimulus measures in North America, Europe and Asia-Pacific ensured that there was ample liquidity generally available.
Even as certain corporate borrowers and issuers sought to increase their liquidity reserves through the pandemic, the debt markets have continued to function robustly and other borrowers have taken a more strategic approach to extensions of near-term maturities and refinancings of loans and bonds maturing in 2021 or 2022.
According to ratings agency S&P, borrowers have successfully been able to push out debt maturities and reduce the amount of borrowing due for repayment in the near-term, as evidenced by the fact that, even with new issuances down for H1 2020, the amount of debt maturing in 2025 has increased by 35%, while the amount of debt maturing in 2021 has been reduced by 10%.
S&P analysis shows that over the past four years, average annual debt issuance has exceeded the amount of debt maturing between now and 2025, indicating that debt markets will continue to have sufficient available liquidity to allow companies to continue to refinance debt that will mature in the coming years.
Private debt markets step into the refinancing mix
Refinancing options have not been limited to regulated banks and similarly situated capital providers either. In addition to these traditional sources of debt capital, the rising numbers of new entrants into the private debt markets has positioned alternative and non-bank lenders as credible and attractive options for sources of capital to borrowers seeking to refinance existing debt.
According to Preqin data, private debt assets under management (AUM) continued to expand through the pandemic. The latest figures put private debt AUM at US$887 billion at the end of June 2020, up from the US$842 billion recorded at the end of December 2019. Prequin models forecast that private debt AUM will reach US$1.46 trillion in 2025.
This consistent expansion of available capital in the private debt markets has resulted in private debt becoming the third largest asset class in private capital, trailing only private equity and real estate.
Not only has the market increased, but according to Prequin data, the average size of private debt deals has risen from US$70.9 million in 2019 to US$84.8 million in 2020, with the increase in billion dollar-plus loans lifting the mean.
As a result, while the private capital markets have historically been seen as sources of capital for small or mid-cap transactions, large-cap businesses with sizable refinancing requirements can now turn to private debt markets.
Amend and extend
As the last year has shown, even in the context of market stress, the robust market liquidity and aggressive stimulus, paired with regulatory restrictions on foreclosure, have allowed even borrowers facing financial stress to push out maturities via existing extension mechanics while seeking covenant waivers and other loan modifications.
For many financial sponsors and lenders who experienced the previous financial crisis, amendment and extension strategies have been a well-trodden path. Amend-and-extend deals have given companies time and flexibility to enhance performance and adjust their operations internally, before pursuing replacement financing in the market. Lenders have also been supportive of partnering with their borrowers that have financially sound businesses, but operate in sectors directly impacted by lockdowns and COVID-19.
In North America, for example, there were 86 “amend-and-extend” deals worth US$108.26 billion in Q1 2020 and 76 deals worth US$69.15 billion in Q2, according to Debtwire Par data—compared to 55 such deals worth US$70.04 billion in Q4 2019. This demonstrates lenders’ willingness to renegotiate loan agreements and give borrowers more breathing room as market uncertainty escalated due to COVID-19.
With lenders willing to offer forbearance, and banks and non-banks replete with capital and eager to deploy, the so-called “maturity wall” (if it exists at all) does not appear very difficult to hurdle.