While issuance of investment-grade debt in the U.S. has been near record levels recently, speculative-grade issuance has plummeted and volatility has spiked as the COVID-19 pandemic has spread across the globe and shut down significant parts of the global economy. Although some states are beginning to re-open, and we expect more states to follow, it is too early to tell how quickly the economy will return to full output. S&P Global economists expect GDP in the U.S. to contract 5.2% in 2020 and then grow by 6.2% in 2021. Although the Federal Reserve has set the target federal funds rate at 0%, credit spreads have widened and should keep financing costs elevated.

Regardless, there is close to $43.8 billion of debt maturing over the next five years for the 53 finance companies we chronicle in this report (see appendix for individual debt maturity profiles), and nearly 79% of such debt is speculative grade. Moreover, of these companies, 40% have a rating or an outlook that is lower than where it was in April of last year and 45% have negative outlook or ratings on CreditWatch negative. Although some finance companies have taken advantage of attractive financing conditions to stagger their debt maturities over the past couple of years, we expect many to see their financing costs rise, some materially, as they look to refinance their debt in tougher conditions.

Although this $43.8 billion in finance company debt that is scheduled to mature through 2024 represents a narrow slice of the more than $1 trillion in financial services debt maturing over the same period, these nonbank finance companies play an increasingly important role in providing funding and liquidity to leveraged borrowers in the U.S. With these issuers facing potentially rising financing costs, these costs could be transmitted through higher funding costs, or less credit availability, more broadly across leveraged borrowers.

Financial Market Volatility Spiked In March

In 2019, U.S. finance companies were active in the debt capital markets. The 53 finance companies that S&P Global Ratings rates in the U.S. have nearly $75.5 billion in rated debt outstanding, and these companies raised or refinanced 23% (or $17 billion) of this debt just last year. Over the next five years, these finance companies have $43.8 billion in nonrevolving, nonsecuritized debt maturing, with a peak maturity of $14.6 billion in 2023. We exclude captive finance companies such as Ford Motor Credit Co. LLC, General Motors Financial Co. Inc., and Hyundai Capital America, because they are high-volume, active issuers with more debt than the entire finance company sector as a whole, and face different refinancing risks versus independent finance companies.

Heading into 2020, credit conditions have tightened considerably. During March, total high-yield debt and leverage loan volume was $19 billion in issuances compared with $63 billion in March of 2019, based on LCD data. We then saw a significant rebound in April with $55 billion in issuances, roughly flat compared to the year-ago period. However, that predominantly came from high-yield bonds, including a jump in secured bonds, with the loan market remaining suppressed. There also remains little issuance of debt issued in the 'B' category, most of it coming in the 'BB' category.

Financial market volatility flared in March with the spread of the COVID-19 pandemic in the U.S., which triggered a period of market dislocation in the credit markets. The primary market for speculative-grade bond issuance was shut for a 17-day stretch in March, and the leveraged loan market was closed to new institutional issuance for the whole month. This was the first time since the 2007-2008 recession where no new institutional loans came to market for an entire month.

However, even with markets facing temporary dislocation, bond issuance surged after the Federal Reserve announced extraordinary measures to support liquidity in the primary and secondary markets on March 23. Record levels of investment-grade bond issuance in the last week of March brought issuance volumes to a record $465.8 billion in the first quarter. Debt markets subsequently began to open up for new issuance of speculative-grade bonds in late March, and for institutional leveraged loans in April.

Nonfinancials led this surge of new issuance in the first quarter, reaching a record of $315.9 billion in the first quarter, while financial services issuance reached $144.8 billion--its highest level since first-quarter 2017.

Chart 1

While strong issuance volumes from investment-grade financial services continued through both March and April, speculative-grade financial services issuance lagged with just $1.3 billion in new bond issuance coming to market during those two months. Various companies in multiple sectors issued debt in April to address liquidity concerns despite higher costs. Although interest rates have fallen, credit spreads have widened substantially. We expect higher interest rates will continue to pressure debt costs and demand for the foreseeable future, although that a majority of the debt issued by finance companies in recent years has been with fixed-rate coupons will offset this. We expect issuances to pick up as issuers look to build liquidity.

As investors shunned risk assets in March, funding costs for speculative-grade issuers widened at an unprecedented rate. Financial services' speculative-grade bond spreads widened to near 1,000 basis points (bps) above treasuries on March 23--approaching a level generally considered to be distressed--after averaging around 400 bps for much of 2019. Spreads tightened considerably after the Fed extended its primary- and secondary-market credit facilities to some speculative-grade credit on April 4, yet they remain elevated near 800 bps at the end of April.

Chart 2

Nearly $78 billion in speculative-grade financial services debt (including bonds and loans, and excluding revolving credit facilities) is scheduled to mature through 2024, and nonbank finance companies account for most of this debt. Issuers have some time before the bulk of this debt comes due, as these maturities do not peak until 2023.

Chart 3

Global Recession Has Led To A Wave Of Negative Rating Actions for U.S. Nonbank Financial Institutions

With over 90% of the population under stay-at-home guidelines, up from three-fifths in late March, U.S. economic activity has stopped for the most part. S&P Global economists now forecast U.S. GDP will contract 5.2% in 2020--substantially worse than our March forecast for a 1.3% decline. We expect the current recession to reduce economic activity by 11.8% peak to trough (during the second quarter of this year), which is roughly three times the decline seen during the Great Recession in one-third of the time. Headline unemployment could reach 19% in May, which would be closer to the Depression-era peak of 25% than to the 10% high during the last global financial crisis.

Recovery will be gradual as fears linger and social distancing endures, but we expect the economy will at least partly reopen in the third quarter. We expect the impact from the economic backdrop will reverberate throughout the finance companies we rate but with different levels of impact. As a result, we have revised ratings and outlooks on affected companies accordingly and continue to see downside risk depending on the duration and severity of economic contraction because of COVID-19. Of the finance companies we rate, 40% have a rating or outlook that is lower today than a year ago (see appendix). We've taken several negative rating actions, especially in the BDC, CRE, and residential mortgage sectors (see "Rating Actions On Commercial Real Estate Finance Companies Reflect Funding And Liquidity Risks Because Of COVID-19," "Rating Actions On Four Business Development Companies Reflect The Economic Impact Of Both COVID-19 And Lower Oil Prices," and "Rating Actions On Three U.S. Residential Mortgage Servicers Reflect Funding And Liquidity Stress From COVID-19").

S&P Global Ratings rated approximately $75.5 billion of bonds, notes, and loans issued by finance companies in the U.S. as of March 14. The numbers above only take into account term loans and bonds. Finance companies are more likely to use short-term, floating-rate funding facilities and warehouse lines than a typical corporate entity, so changing interest rates will have a more immediate impact on the bottom line. Commercial real estate (CRE) lenders use repurchase agreements to finance real estate properties, residential mortgage companies and auto lenders use warehouse lines to originate new loans, and many money transfer companies have revolving credit facilities from banks. But when it comes to longer-dated debt, the majority of companies opted for fixed-rate coupons over the past several years. As finance companies refinance maturing debt, the coupons they pay will likely be higher.

Volatility Strains Financing

March 2020 saw bids for leveraged loans plummet and pricing skyrocket as spreads widened. The average bid on the S&P/LSTA Leveraged Loan Index fell to approximately 76 in late March after averaging 96.5 in 2019. Similarly, the spread among term loan B issuances for 'B' and 'B+' rated borrowers increased to LIBOR +440 bps after starting the year at LIBOR +360 bps. Issuances among finance companies we cover were $17 billion for 2019, compared to $24.1 billion for 2018, and $19.3 billion for 2017. Some companies took advantage of better pricing in late April to issue debt, and we expect similar trends in May. This will likely stop once sufficient liquidity is raised or when prices become prohibitive.

Chart 4

Chart 5

Over the past three years, finance companies we rate prefunded maturities and opportunistically upsized their offerings at relatively lower costs of funding and minimal debt covenants as capital markets searched for yield. However, the environment now seems to indicate that companies that have not refinanced yet may have lost their last chance at locking in low rates or attractive terms. In addition, any near-term maturities could pose serious risk to liquidity if a company is not proactive when prices warrant. Issuing borrower-friendly covenant lite (cov-lite) loans may have peaked in 2017 and 2018, with over 80% of 2018 loan volume identified as cov-lite by LCD. The percentage was even higher in 2019, but volumes overall fell with a weak first quarter of that year. Similarly, opportunistic loan volume for repricing, refinancing, or financing dividends also appears to have decreased meaningfully since the second quarter of 2018. The percentage of cov-lite loans may be skewed this year as higher rated issuers may be overrepresented relative to prior years.

Chart 6

2019 Debt Issuance: The Companies That Issued Debt In The Ninth Inning

Among nonbank financial institutions, consumer finance, money and payment processing, and CRE accounted for nearly 70% of capital raised in 2019. The remaining 30% was split among business development companies (BDCs), commercial credit, and noncaptive auto finance companies. The split in 2019 between investment-grade issuance (25%) and speculative-grade issuance (75%) was roughly in line with the split of outstanding finance company debt.

Chart 7

Consumer finance companies were the largest group of finance company issuers in 2019 by amount of debt, with $4.1 billion of debt raised. The largest issuer was once again OneMain Holdings Inc. (BB-/Stable/--), which issued $1.3 billion of notes due 2024, $800 million of notes due 2028, and $750 million of notes due 2029. Fairstone Financial (B+/Watch Dev/--) issued $425 of senior unsecured notes due 2024, goeasy (BB-/Stable/--) issued $550 million of senior unsecured notes due 2024, and CNG Holdings (B/Stable/--) issued $310 million of senior secured notes due 2024.

Money and payment services was the second-largest subsector by debt issuance with $3.9 billion of debt raised in 2019. WEX Inc. (BB-/Negative/--) amended and refinanced its $1.37 billion term loan B, which extended the maturity three years to 2026. Euronet Worldwide (BBB/Negative/--) issued $525 million of convertible notes due 2049 and €600 million of notes due 2026. Moneygram (B/Negative/--) refinanced its capital structure by issuing a $645 million first-lien term loan due 2023 and a $245 million senior second-lien term loan due 2024. Lastly, Western Union (BBB/Stable/A-2) issued $500 million of senior unsecured notes due 2025.

CRE lending and services companies issued $3.7 billion in 2019. The most active was iStar (BB/Negative/--), which issued $775 million of senior unsecured notes due 2024 and $550 million of senior unsecured notes due 2025. Blackstone Mortgage Trust (B+/Negative/--) raised a $745 million term loan due 2026, Newmark Group (BB+/Stable/--) issued $550 million of senior unsecured notes due 2023, Apollo Commercial Real Estate (B+/Negative/--) issued $500 million term loan B due 2026, Avison Young (B-/Stable/--) secured a $325 million bank loan due 2026, and CBRE Services (BBB+/Stable/--) issued $300 million of senior unsecured notes due 2024.

Chart 8

Finance Company Maturities Peak In 2023

S&P Global Ratings expects about $4.09 trillion of rated U.S. corporate debt to mature from the second quarter of 2020 through year-end 2024. Financial companies (including banks, insurance companies, and finance companies) account for just 26% of the debt maturing during this period (or $1.08 trillion) (see chart 7). We see finance company maturities as a percent of financials gradually rising from 2%-4% in 2020 to 2022 to approaching 6% in 2023 and 8% in 2024.

In 2020, there is $2.6 billion of finance company debt due. In June, Element Fleet Management has $547 million and Loancore Capital Markets has $300 million. Later in the year, Navient Corporation has $500 million due in October and OneMain Holdings has $1.0 billion due in December.

Chart 9

Of the $43.8 billion of finance company debt maturing over the next five years, approximately $9.2 billion (21%) has an investment-grade rating and $34.5 billion (79%) has a speculative-grade rating. Our highest rating on debt instruments is 'BBB+' and our lowest rating is 'CCC-'. In the investment-grade category, there is $5.7 billion of debt rated 'BBB-', which is just one-notch above speculative-grade. Within speculative-grade ratings, $16.9 billion is in the 'BB' category, $17.1 billion in the 'B' category, and $600 million in the 'CCC' category.

Chart 10

Qualitative Factors By Sector

Between now and 2024, $14.5 billion of maturing debt is in the consumer finance sector, $7.5 billion in money and payment services, $7.2 billion in CRE, $6.4 billion is by BDCs, $4.5 billion in residential mortgage, $1.5 billion in noncaptive auto finance, and $1.4 billion in specialty finance (see chart 11).

Chart 11

Sector-specific considerations

Auto finance.   COVID-19-related stress has resulted in a sharp increase in extensions across both the prime and subprime auto lending segments. We believe higher unemployment will likely result in material credit deterioration in the future depending on the length and severity of economic distress. Further, we believe a higher frequency of losses from macroeconomic factors could be compounded by higher severity of losses due to decreases in the value of used cars. Recently, wholesale volumes for used cars have been depressed as few lenders are repossessing cars and dealerships are not in need of inventory as sales have fallen. What happens once customers come off forbearance will be a driver of things to come, with rising delinquencies post-forbearance a key indicator. This, again, will be driven in part by how the macro environment evolves in the coming months.

BDCs.   We expect the economic impact of COVID-19 will result in increased investment portfolio losses (realized and unrealized); higher draws on unfunded commitments by portfolio companies, which may strain BDCs' liquidity; and challenging financing conditions for BDCs. We also expect the sharp decline in oil prices to exacerbate the impact on related investments. We have recently taken various negative rating actions on BDCs and our current ratings on BDCs reflect our expectation of increased investment portfolio losses due to COVID-19-related economic turmoil, which would result in reduced asset coverage ratios. A decline below 200% (or 150% for those BDCs which have adopted a 150% modified asset coverage requirement), would restrict a BDC's ability to incur additional debt, thereby limiting financial flexibility. Also, BDCs' credit facilities typically include asset coverage ratio covenants, which constitute events of default if breached. Moreover, we think the sharp declines in stock prices make equity raises unattractive.

Commercial credit.   Overall, commercial lenders are likely to see credit deterioration in most segments, and particularly in certain pockets, such as the energy sector and retail. There could also be pressure on net interest income because of lower rates and higher funding costs. Also, we anticipate more challenging conditions for loan syndications and higher than usual draws on revolving credit facilities.

Commercial real estate.   COVID-19-related turmoil has materially worsened financing conditions, and we anticipate weakened liquidity and asset quality to emerge over time. We have recently taken various negative ratings actions on CRE lenders and our current ratings on CRE lenders reflect a lower assessment of funding profiles amid difficult financing conditions. Many of the finance companies we rate rely heavily on repurchase facilities for funding, and in some cases for more than half of their borrowings. The risk of margin calls related to repurchase facilities is elevated, in our view. However, terms and conditions vary across facilities, and some are at greater risk than others. While some facilities allow for collateral to be marked based on market interest rates and credit spreads, many others only allow for collateral to be marked based on credit valuation adjustment events. Also, advance rates under some facilities are subject to "look-through" advance rates, while others are not. Apart from risks related to repurchase facilities, we believe access to all funding sources on economic terms, particularly unsecured funding, is diminished.

We also expect for asset quality to weaken in the coming months, as well as tougher funding conditions and strained liquidity. We see the greatest risk in hotel and leisure properties, but we also believe deterioration will emerge in retail properties and possibly office properties. Also, many of the CRE finance companies are exposed to construction and transitional loans, which, in our view, are at heightened risk due to the disruption because of COVID-19. To navigate through these more difficult times, many companies have built liquidity defensively, which we consider prudent, at the cost of higher leverage and lower returns.

Commercial real estate servicers.  While we believe there will be material impact to CRE servicers from the current environment, we believe that diversity of revenue sources and ample liquidity should mitigate some of the risks, particularly among our higher rated issuers. We expect to see stress in less recurring sources of fee revenue, particularly in capital markets and to a lesser degree in leasing. We believe more recurring sources such as property management and facility management will be much more stable by comparison. Overall, while we expect EBITDAs will decline somewhat this year, reductions in variable costs and less volatile sources of revenues should support ratings.

Consumer finance.  In 2019, the debt prices on payday lenders remained unchanged around 90 despite federal regulation risk fading as different state regulators passed laws that implemented interest rate caps and compelled payday lenders to exit those markets. While the capital markets were still open in 2019, payday companies had no imminent liquidity needs and primarily accessed the securitization markets to raise capital. In 2020, the coronavirus pandemic has led to credit spreads widening to over 1,000 basis points for payday lenders, with majority of names trading down to 75 bps to 80 bps. The pandemic will lead to reduced originations, increased provisions for credit losses, and higher charge-offs, which could create liquidity issues in the near term due to high operating and financial leverage. We still favorably view companies transitioning to more installment lending from short-term lending and streamlining their business operations by reducing retail footprints. At this point, there are no 2020 unsecured debt maturities for payday lenders we cover, but we remain watchful of payday lenders planning to buy back debt at current prices to reduce its financial leverage.

Residential mortgage.   The U.S. mortgage market faces a dichotomy of unprecedented demand for mortgage forbearances coupled with historically low 30-year mortgage rates bolstering refinancing activity. The Coronavirus Aid, Relief, and Economic Security (CARES) Act stimulus package requires mortgage servicers to provide a forbearance option to any homeowner with a federally backed mortgage that is directly or indirectly affected by COVID-19. Consequently, we believe mortgage servicers' funding and liquidity will experience stress because the servicers will still be required to advance principal and interest payments to residential mortgage-backed security (RMBS) trusts even when mortgageholders stop making payments to them (a negative carry). Moreover, we expect the higher costs to service for such mortgages and lower interest rates could lead to substantial mark-to-market losses on mortgage servicing right (MSR) portfolios, hurting debt-to-tangible equity metrics. One bright spot is refinance activity is booming. Currently, the 30-year rate is 3.26%, the lowest rate since Freddie Mac started tracking the data a half century ago. The mortgage origination companies we rate are reporting increased volume and higher gain-on-sale margins since the sudden demand outpaced industry capacity. S&P Global Ratings expects the 30-year mortgage interest rate to be 3.5% for 2020 and rise to 3.7% in 2021.

Money transfer and payment processing.   Lower global economic activity will create headwinds for the money transfer and payment processing companies that we rate. We expect the challenges will be most acute in the second quarter of 2020 because of stay-at-home and shelter-in-place orders in the U.S. and abroad. The World Bank expects global consumer-to-consumer remittances to fall to $566 billion in 2020, compared with $707 billion in 2019. Lower fuel prices and fuel spending, and less travel will also hurt earnings for payment processors. Despite our expectation for lower earnings, we believe several of the companies we rate have the capacity to build cash through earning and manage their net debt leverage ratios.

Future Debt Issuances Will Likely Be Leverage Neutral And Defensive In Nature

We believe future issuances will focus on either refinancing existing debt stacks or building liquidity for defensive purposes. Still, we believe borrowing costs for issuers will be higher in 2020, especially for companies where we have taken negative rating actions. We continue to believe that a well-staggered debt maturity ladder is the best strategy from an issuer credit rating perspective. Over time, as economic conditions stabilize, we could see select companies opportunistically issue debt for mergers and acquisitions and take advantage of perceived dislocations in valuations of complementary businesses.

Appendix: Finance Company Debt Maturities

Related Research

• Global Financing Conditions: Bond Issuance Will Likely Contract 9% In 2020, April 27, 2020
• Rating Actions On Three U.S. Residential Mortgage Servicers Reflect Funding And Liquidity Stress From COVID-19, April 13, 2020
• Rating Actions On Commercial Real Estate Finance Companies Reflect Funding And Liquidity Risks Because Of COVID-19, March 26, 2020
• Rating Actions On Four Business Development Companies Reflect The Economic Impact Of Both COVID-19 And Lower Oil Prices, March 24, 2020
• U.S. Refinancing--$4.8 Trillion Of Rated Corporate Debt Is Scheduled To Mature Through 2024, Feb. 27, 2020