High Yield Market: Upcoming Maturities
By Heather Rupp, CFA, Director of Communications and Research Analyst for Peritus Asset Management, Sub-Advisor of the AdvisorShares Peritus High Yield ETF (NYSE Arca: HYLD)
One thing we look at as a high yield bond investor is the amount of upcoming maturities, as it can be important as we think about both defaults and the supply of new bonds. Below the amount of upcoming maturities are charted by year for by both bonds and loans.1
Focusing on the bond market, as we look at forward default expectations, upcoming maturities are certainly a consideration. Very, very few bonds are actually taken out with cash at maturity. Rather, companies look to issue new bonds or bank debt to refinance their existing debt prior to maturity which can be anywhere from a few months to years before the bonds mature. The problem becomes that if the company is in a weak position and the market demand/interest is not there for them to refinance and repay their bonds, then a maturity can be a default trigger. Whether they have been paying the interest on a bond or not, if they can’t repay principal at maturity it generally results in a default. Looking at the next two years, this shows about $133 billion in high yield bonds maturing. This is a relatively small number at less than 10% of the total high yield bond market value.2 Seeing this low dollar amount of maturities supports the very benign default outlook (see our piece, “High Yield Default Rate: 2016 Review and 2017 Outlook”).
The other reason as high yield investors we look at the amount of upcoming maturities is that it is an indication of future supply. We don’t have a large maturity wall in the coming years, but things start to pick up in 2019 and beyond. As mentioned above, companies often look to refinance their bonds years ahead of a maturity. Currently we are seeing a number of new issues coming to market to take out maturities through 2021. In 2016, we saw primary market activity of $286bn in total USD high yield bond issuance, with 58% of that related to refinancing activity.3 Projections are for issuance to total $300bn in 2017, so a slight increase y/y, with about 50%, or about $150bn due to refinancing activity.4 Looking at the upcoming maturities, this 2017 issuance projection certainly seems reasonable.
In late 2015, as we looked at ways to potentially increase the liquidity and dampen volatility within our strategy, we decided to allocate a portion our portfolio to new issue bonds, as our experience and market research indicated that bonds tend to be most liquid immediately following issuance. While these are short-term holdings, we believe this strategy has effectively met our goals in terms of liquidity and volatility. Given the expectation of a steady supply of newly issued bonds, due to largely to the refinancing referenced above, along with other use of proceeds such as mergers and acquisitions and general and corporate purposes, we expect that there will be ample supply for us to continue with this strategy for the foreseeable future.
A strong new issue market over the past several years and issuers continually looking to extend maturities and refinance existing bonds has positioned as well in terms of the low amount of maturities over the next couple years, boding well for default rates, and a continued supply of refinancings for future years, supporting our ability to continue to execute our new issue strategy.
1 Jantzen, Nelson, CFA and Peter Acciavatti, “JPM High-Yield and Leveraged Loan Morning Intelligence,” J.P. Morgan North American Credit Research, January 17, 2017.
2 Acciavatti, Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update,” January 20, 2017, p. 41, indicated high-yield bond market value of $1.9trillion.
3 Acciavatti, Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “High-Yield Market Monitor,” January 3, 2017, p. 11.
4 Acciavatti, Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “2016 High-Yield Annual Review,” December 29, 2016, p. 11.