Moody's sees junk risk in $1.4 trln refinance wave

NEW YORK Mon Feb 1, 2010 8:00pm EST

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NEW YORK Feb 1 (Reuters) - U.S. junk-rated borrowers, holding the bulk of $1.355 trillion in corporate debt maturing in the next five years, may face refinancing challenges if the U.S. economy stumbles, Moody's Investors Service said in a report on Monday.

Most of the debt stems from unprecedented leveraged buyout activity leading up to 2007, before the global credit crisis took hold, the rating company said, noting mega deals from TXU, HCA, First Data, Univision and Freescale.

While debt coming due in the next two years won't pose a great risk, the biggest chunk of speculative-rated debt, some $700 billion worth, comes due between 2012 and 2014.

"If the economic recovery continues to have legs, these maturities should be very manageable, but that's a big if," Kevin Cassidy, senior credit officer in New York, told Reuters. "The risk is if things don't return to normal, there are some big maturities in the later years, which could cause trouble for lower-rated issuers."

About $550 billion of investment-grade corporate bonds are maturing over the next five years, compared to $805 billion for speculative issuers, including $555 billion in bank loans and revolvers and $250 billion of bonds.

"The punchline of this report is the near-term maturities are not that bad," Cassidy said. "What's to be concerned about is the debt coming due after 2012."

For factbox on issue, please click on [ID:nN01192246].

High-yield default rates peaked at 13.8 percent in November 2009 and are expected to fall to 3.6 percent by December 2010, the report said.

Texas Competitive Electric Holdings Co LLC has $24 billion of high-yield debt coming due in the next five years, followed by HCA Inc and Ford Motor Co with $15 billion each, making up the top three issuers in terms of debt maturities, Moody's said.

SPECULATIVE APPETITE

While collateralized loan obligations helped the market absorb debt during the LBO boom, CLO issuance has dried up since that market was decimated by fallout from the Lehman Brothers bankruptcy.

Whether the market avoids being overwhelmed by the debt onslaught will depend on the strength of the U.S. economy, prevailing interest rates and the credit market's appetite for speculative-grade debt, the agency said.

A rally in the high-yield bond market last year helped ease refinancing risk for some issuers. As healing credit markets boosted investors' tolerance for risk, demand for those junk bonds surged last year, fueling a record $145 billion of bond sales, Moody's data showed.

But leveraged loan issuance fell significantly over the past two years, and it is uncertain whether the high-yield bond market can continue to fill the financing void left by the banks, Moody's said.

Among investment-grade corporate bonds, Moody's said debt rated Baa3, the lowest investment-grade rating, pose the highest refunding risk. For tables of the top ten Baa3-rated bonds set to mature, click [ID:N01192246]

Adding to junk market supply, about 40 former investment-grade companies with more than $80 billion of debt were downgraded to junk status during the recession of the last two years. Among the largest "fallen angels" were Weyerhaeuser, J.C. Penney, Sprint Nextel, Masco and Harrah's Entertainment.

If the economy and the high-yield bond and leveraged loan markets continue to recover, it is possible refinancing needs could be met, Moody's said. Over the past 10 years, issuance of junk-rated bonds and loans has averaged about $485 billion a year, which would be sufficient to absorb peak refunding needs of $338 billion in 2014, Moody's said.

However, the state of the economy remains fragile, and issuers could face rising financing costs, especially as the volume of maturing debt grows, the agency said.

(Reporting by Dena Aubin and Walden Siew; Editing by Andrew Hay)

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