Anyone working in the restructuring industry has undoubtedly come across the ominous term “debt maturity wall” in relevant business articles and industry publications. Similar to other feared apparitions such as the Loch Ness Monster and Sasquatch, the ripe wall is visible from great distances, but never up close. Likewise, these sightings are episodic and evidence of their very existence is tenuous, yet they remain ingrained in the public’s memory. What keeps them going? The possibility that they are real.
The term “Maturity Wall” dates back to 2010, as a result of the global financial crisis. At this point, aggressive actions by global state actors and central banks helped avert the doomsday scenario of a rapid collapse of the global financial system, and the worst of the economic downturn was behind us. But no one had yet given the all-clear. Corporate credit markets were functioning somewhat normally after stalling for a time in late 2008 and 2009, and companies borrowed heavily when that window finally opened. U.S. leveraged credit issuance totaled $465 billion in 2010, exceeding the $3,101 billion issuance total in 2008-2009 and surpassing pre-crisis issuance amounts of over $500 billion. dollars per year came considerably close. The domestic economy crawled out of the cave, from which it would fully emerge in 2012.
The first mention of a “maturity wall” came at the end of 2010, when a report from Moody’s stated: “…the impending wall of debt maturities between 2011 and 2014 is progressing and increasing the refinancing risk of issuers.”2 Within a few years The term “maturity wall was common in business parlance, referring to the growing wall of staggered corporate debt maturities that was building up overall over time as more speculative companies increased their borrowing and systematically refinanced debt a year or two in advance of scheduled maturity—and left assume that they could further extend the maturity of the debt on similarly favorable terms. “Kicking the can” became a related term in restructuring circles during these years, referring to the practice of opportunistic debt refinancing that averts a potential restructuring event, which is only possible if credit markets accept it. “Kicking the can” made the “maturity wall” grow higher.
The first year that the maturity cap was expected to collapse in Corporate America was 2012. Many LBOs closed in 2007—the last and busiest year for buyouts before the financial crisis—and were financed with five- or six-year leveraged loans . Certainly, after this catastrophic episode, the credit markets would have little desire to refinance these loans. (Wrong!) Additionally, in 2008 and 2009, banks were reluctant to declare corporate loans defaulted for reasons other than defaults (although they could have). During this short 18 months, advanced maturities, defaulted financial covenants and other technical defaults were often canceled or suspended, while scheduled loan terms were sometimes extended – the first appearance of the “Amend & Extend” (A&E) practice that prevailed for several years thereafter. The maturity of many of these A&E loans has been pushed back to 2012, when it would be time to pay the piper. A Moody’s senior credit analyst said at the time, “An avalanche is brewing in 2012 and beyond if companies don’t shy away from it.”3 They did—and most of that leveraged debt was refinanced, with those maturities pushed back until 2014 -2016. Leveraged loan issuance totaled nearly $675 billion in 2012, including high-yield bond issuance that topped $300 billion for the first time, followed by a then-record issuance of $975 billion in 2013.4
To get to the point: Since 2012, the drama of the maturity barrier has flared up in the business media every few years, but has never had any consequences. Each time, the massive wall of debt maturity that was four to five years away was dismantled in the meantime until the amounts due by the approach of the distant year were manageable, as we have documented in detail in Figure 1. Those in the distant future were pushed aside Amounts due in years are even larger, but over time again without consequences. Today, U.S. speculative debt securities due 2028 total nearly $700 billion. This is far more than the $380 billion in planned 2014 debt that came due in early 2010, although the number, size and yields of risky borrowers have increased, so we do not want to overdramatize the absolute amount of this change. But can this game continue indefinitely?
Of course, the Fed’s massive quantitative easing for most of the last 15 years has been the big trigger for the repeated breaching of the term limit, not only in times of crisis but also in years when the domestic economy has no obvious need for such aggressive measures intervention had means. Consider, for example, that between 2012 and 2014, the Fed’s total assets rose from $2.8 trillion to $4.5 trillion, a larger absolute increase than the Fed’s purchases during the global financial crisis. Since the Fed’s asset purchases are paid for by crediting banks’ reserve accounts, this is an indirect creation of money. In addition, the “Fed put” – the belief that the Fed would use monetary easing to support financial markets if necessary – took hold in credit markets and further encouraged risky lending and easing standards.
Today, the “Fed put” is dead, interest rates are at their highest in 16 years, and leveraged credit markets are arguably in their most dangerous moment since 2008-2009. As we continue to see distressed borrowers taking extreme measures to deal with liability on an almost regular basis, there should be no misunderstanding about what is happening. Lenders are reaping the consequences of what they have sown for years, in the form of loose or permissive provisions in loan documents negotiated with borrowers, typically large PE sponsors, that enable many of these bold maneuvers. None of this happened through negligence or accident. It is the inevitable result of a financial world awash in liquidity for a decade, in which borrowers and lenders favored by the negotiating advantage willingly capitulated to their aggressive demands or risk missing out on a deal – and perhaps future deals. The explosion in private lending in recent years is only giving borrowers more room to negotiate to push for favorable loan terms and leaky reserves, something that would have been unthinkable 15 years ago.
More recently (since the Fed’s aggressive tightening began in mid-2022), the pendulum has swung back toward lenders, causing traditional lenders to become more cautious on lending standards and somewhat more demanding on terms and conditions. But as we’ve seen since early summer, companies have stepped up as the credit window opened wider, and issuance of leveraged debt – bonds and loans – has been more robust in recent months. And again, many speculative debt instruments with 2024 maturities have been addressed, with the exception of the weakest borrowers who do not have access to leveraged credit markets in this high interest rate environment.
As for the impact of these developments on the maturity threshold, the idea that leveraged credit markets would ever experience a major paradigm shift away from relaxed credit standards – a moment of clarity in which they would collectively decide not to take all of these aggressive measures – is a challenge take action There are no more deals – seems a bit naive in retrospect and unlikely for the future. There is simply too much money earmarked for lending, and that is no less true today than it was a few years ago. In particular, the rise of private credit (which is now over $1 trillion (AUM) and competes with the syndicated institutional loan market for large leveraged loans, but was only a nascent source of capital a decade ago) appears to be about to take off to be in its golden age. according to some industry observers. Private credit loans of more than $1 billion are no longer uncommon, nor are multi-billion dollar private credit funds. That doesn’t mean the money tap is wide open or that bad decisions won’t be made, but money needs to be used – that’s the top priority – and any negative consequences of that will occur in the future.
More likely than a paradigm shift, changes in credit market practices and risk appetite will occur gradually and at the margins. For example, acquisitions with 6X EBITDA leverage will likely still be funded, but deals with 7X-8X EBITDA will not. Furthermore, “longer-term higher” interest rates will certainly impact the ability of some risky borrowers to repay their debts and defaults will accelerate, but it seems unlikely that credit markets will return to this old religion without a longer-term economic downturn or shock event. Here too, the maturity barrier will have no consequences, at least not before 2025, so let’s let it rest for now. Like other mythical creatures, the dreaded ripening wall seems to remain an invention of our minds. But you never know.…
Figure 1 – Analysis of maturities of speculatively rated S&P-rated US corporate bonds since 2010
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