Favorable financing conditions persist for the finance companies and asset managers we rate after a year of strong issuances. For this article, finance companies and asset managers will be collectively referred to as nonbank financial institutions (NBFI). The accommodating environment is built on the view that pandemic-related worries and volatility are behind us and near-record low interest rates are too hard to pass up.

S&P Global Ratings rated $38 billion of debt issued by NBFIs in 2020, and 2021 is already off to a strong start. Investment-grade issuers are taking advantage of the ultra-low rates and issued a proportionally large amount of debt this past year in comparison with the overall outstanding debt maturity stack.

Chart 1

Although the amount of NBFI debt maturing through 2025 represents a narrow slice of the more than $1.35 trillion in North American financial services debt maturing over the same period, NBFIs play an increasingly important role in providing funding and liquidity to leveraged borrowers and financial services to consumers in North America.

North American NBFIs were active in the debt capital markets in 2020 after a rocky start. The 97 NBFIs that S&P Global Ratings rates in North America have more than $160.7 billion in rated debt outstanding, and these companies raised or refinanced 24% (or approximately $38 billion) of this debt in 2020 alone. Over the next five years, these companies have $71.4 billion in nonrevolving, nonsecuritized debt maturing, with a peak maturity of $24.3 billion in 2025. More than 63% of the debt is speculative grade (see appendix for individual debt maturity profiles).

We exclude captive finance companies like 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 NBFI sector, and face different refinancing risks versus independent NBFIs.

A Rising Tide Lifts All Boats

Financial services issuers (including banks and insurance, along with NBFIs) continue to have favorable financing, particularly those rated investment grade. Bond issuance rose by 41% quarter-on-quarter to $156 billion in the first quarter of 2021, exceeding quarterly issuance volumes from the second half of 2020. Speculative-grade financial services issuance volumes remain higher than the average before 2020.

Chart 2

Even as issuance volume increased and treasury yields rose in the first quarter, funding costs for financial services have returned to pre-pandemic levels and remain near historic lows.

Chart 3

2020 NBFI Debt Issuance: Making Up For Lost Time

Although capital markets were largely shut-off from March to April in 2020, strong issuances the remainder of the year made up for lost time. Asset managers (traditional and alternative), residential mortgage, and commercial real estate (CRE) companies accounted for 73% of the capital raised in 2020. The remaining 27% was split among consumer finance and others. Investment-grade issuers took advantage of low rates in 2020 as the split between investment-grade issuance (46%) and speculative-grade issuance (54%) was not in line with the outstanding debt split.

Chart 4

Traditional asset managers were the largest subsector of NBFI issuers in 2020 by amount of debt, with nearly $9.0 billion of debt raised. BlackRock, Inc. (AA-/Stable/A-1+) was by far the largest issuer in the group, with $1.25 billion senior unsecured notes due 2031, and $1 billion senior unsecured notes due 2030. FEH, Inc. (BB/Negative/--) repriced and extended their term loan due 2027, and upsized to $1.89 billion.

Alternative asset managers were the second-largest subsector of NBFI issuers in 2020, with $7.0 billion of debt raised. The largest issuer was KKR & Co. Inc. (A/Stable/--), which issued $2.65 billion during 2020 (including $1.15 billion in mandatory convertible preferred shares to partially fund the acquisition of Global Atlantic). Brookfield Asset Management Inc. (A-/Stable/A-1) issued $2.25 billion of debt with long-dated staggered maturities. Blackstone Group Inc. (A+/Stable/--) issued $500 million callable senior unsecured notes due 2031, and $400 million callable senior unsecured notes due 2050. Apollo Global Management, Inc. (A-/Stable/--) issued $500 million senior unsecured notes due 2030.

Residential mortgage companies issued $6.4 billion in 2020. Unlike other sectors, these companies were able to access the unsecured market throughout 2020 because of the pronounced positive affect of the pandemic on originations. Many issuers saw record origination volumes and record EBITDA from originations. Quicken Loans, LLC (BB+/Stable/--), Mr. Cooper Group Inc. (B/Positive/--), LD Holdings Group LLC (B+/Stable/--), Freedom Mortgage Corp. (B/Stable/--), and PennyMac Financial Services, Inc. (BB-/Stable/--) all took advantage of positive trends in the industry to issue unsecured debt in the last half of the year. LD Holdings issued additional unsecured debt in March 2021.

CRE lending and services companies issued $5.4 billion in 2020. The most active was Cushman & Wakefield (B+/Stable/--), which amended and extended a $2.66 billion term loan due 2025, and issued $650 million senior secured notes due 2028. Ladder Capital Finance Holdings LLLP (BB-/Negative/--) issued $650 million senior unsecured notes due 2027 in January before the pandemic. Starwood Property Trust Inc. (BB-/Negative/--) issued $300 million senior unsecured notes due 2023, and a $345 million bank loan due 2026.

Chart 5

Nonbank Finance Company Maturities Peak In 2025

NBFI debt represents a small, but important, piece of the total debt maturing through 2025. We estimate nearly $5 trillion in debt (including bonds and loans, excluding revolving credit facilities) from financial and nonfinancial issuers will mature from the beginning of 2021 through the end of 2025, in the U.S. and Canada.

Chart 6

Financial services' issuers (including banks, NBFI, and insurance companies) account for nearly $1.3 trillion of this debt, of which more than 90% is investment grade. NBFI maturities steadily increase as a percent of financials, rising from 1%-5% in 2021 to 2023, and to 9% and 10% in 2024 and 2025, respectively. Given current capital market access, and rates, we do not believe issuers will have significant trouble navigating near-term maturities.

For the remainder of 2021, there is only $2.1 billion of NBFI debt due. BlackRock Inc. has $750 million due in May, Starwood Property Trust Inc. has $700 million due in December, and Navient has $677 million due in June.

Of the $71.4 billion of NBFI debt maturing over the next five years, approximately $26.7 billion (37%) has an investment-grade rating and $44.6 billion (63%) has a speculative-grade rating. Our highest rating on debt instruments is 'AA-' and our lowest rating is 'CCC-'. In the investment-grade category, there is $9.5 billion of debt rated 'BBB-', just one-notch above speculative-grade. Within speculative-grade ratings, $23.7 billion in the 'BB' category, $20.1 billion in the 'B' category, and $800 million in the 'CCC' category.

Chart 7

Qualitative Factors By Sector

Of the $71.4 billion in debt maturing between now and 2025, $15.8 billion is in the consumer finance sector, $13.1 billion is in the traditional asset managers sector, and $10.0 billion is in the business development company and commercial lending sector, and $9.3 billion is in the commercial real estate sector.

The remaining debt maturity consists of $7.5 billion for alternative asset managers, $6 billion for money and payment services, $4.2 billion in residential mortgage, and $5.4 billion in other (see chart 8).

Chart 8

Sector-specific considerations

Asset Managers

Buoyant markets and our expectations for a stimulus-driven economic recovery support assets under management, and as a result, EBITDA and margins for asset managers; traditional and alternative. We expect long term obstacles to remain, including fee pressures from the shift to passive from active, and outflows continuing among some traditional active asset managers.

We continue to view alternative asset managers we rate as better positioned than traditional asset managers because of locked up capital, strategies that remain harder to index, and generally good performance. High levels of dry powder position alternative asset managers well to invest opportunistically. Partnerships and mergers with insurers remain very attractive growth areas for alternative asset managers, including a few recent comparatively sizeable transactions.

Debt issuance since the pandemic has been robust, and pricing has been attractive, with asset managers using proceeds to refinance existing debt (at a lower coupon), fund growth, or bolster liquidity in anticipation of potential inorganic growth opportunities.

Near-term debt maturities for asset managers remains manageable. We expect the need for additional capital over the coming year will largely be driven by inorganic growth pursuits (large-scale mergers and acquisitions or smaller bolt-ons) as asset managers add or scale capabilities. Financial sponsor-driven dividend recapitalizations may also potentially drive issuance.

Auto finance

Significant credit deterioration did not materialize for auto lenders we rate during 2020. Unemployment insurance, stimulus, and forbearance likely played a significant role in keeping delinquencies stable. The Federal Deposit Insurance Corp. (FDIC) reported net charge-offs for auto loans of 0.32% of average balances for the third quarter of 2020, the lowest quarterly charge-off since the FDIC began reporting the statistic in the first quarter of 2011. Similarly, the Federal Reserve Bank of New York reported auto loans entering 30+ day delinquencies were 5.9% of balances, the lowest since they began reporting the data in 2003. Although delinquencies rose in the second half of the year, they remain well under what we would expect given the current 6.7% unemployment, and peak unemployment above 10% during 2020. After a pause between March and May, the securitization market has been open for auto issuers. By June, spreads were still wide, but benchmark rates were low enough where issuers had near pre-pandemic costs of funding in securitizations. By September, spreads compressed to pre-pandemic levels, while benchmark rates remained low, resulting in near historic low cost of funding for subprime auto asset-backed securities. We remain vigilant of possible credit deterioration in the first half of 2021, particularly if there are further macro headwinds owing to a slower-than-expected decrease in unemployment.

BDCs and commercial credit

Credit losses generally spike during and immediately following recessions. Defaults and restructurings in leveraged loan portfolios are likely to continue as the effects of the pandemic ease. We expect loans on nonaccrual status and realized losses to be earnings headwinds. At the same time, low interest rates help borrowers service their debt, reducing the likelihood of default. Additionally, to the extent that lenders incorporate floors on floating-rate loans, declining rates can enhance net interest margins for lenders.

Commercial real estate lending

We believe CRE valuations, which are typically slow to adjust, have yet to fully reflect the impact of the pandemic. While the retail and hospitality sectors were among the first to be affected by the pandemic, long-term risks weigh on the office and multifamily sectors. The imposition of new global lockdowns could present significant short-term difficulties, especially if vaccine distribution is slower than expected. Financing conditions have been largely supportive so far with debt issuances in the public market, while some CRE lenders received margin call holidays from their bank lenders. We expect CRE lenders to maintain adequate liquidity so they can address any upcoming unfunded commitments.

Commercial real estate services

There will likely be a secular shift in the CRE services sector as companies transition to a hybrid model creating reduced office space requirements. This could lead to declining transactional volume and fee revenues from office leasing long term. We expect the decline in office leasing to be partially offset by a healthy demand from industrial and warehouse leasing. Notwithstanding, we believe the diversity of revenue sources and ample liquidity should mitigate some of the risks, particularly among our higher rated issuers.

Consumer finance

While we expect lenders to gradually increase originations in 2021, we remain cautious about a potential rise in charge-offs and delinquencies as government stimulus and temporary forbearance programs end. We expect the Biden administration to be more proactive with regulations and enforcement than the Trump administration, which could affect operations for some of the nonbank financial institutions we rate. Regulatory changes could affect the lending strategies of consumer financing companies--especially payday lenders that charge a triple-digit annual percentage rate (APR). We still favorably view companies transitioning to more installment lending from short-term lending and streamline their business operations by reducing retail footprints.

Residential mortgage

We expect favorable conditions in the U.S. residential mortgage market to continue as the economy recovers and interest rates remain low. Although gain on sale margins remain elevated, they are beginning to contract and return to historic levels. The Mortgage Bankers Association expects originations to decline to a still very robust $3.3 trillion (from $3.8 trillion in 2020), with an average interest rate of 3.7% for 2021. S&P Global Ratings expects the 30-year mortgage interest rate to be 3.1% for 2021, and rise to 3.5% in 2022. Currently, the 30-year rate is at 2.98%, up from 2.67% at the start of the year. We expect mortgage servicers will manage liquidity demands from servicing advances. Delinquencies have been manageable, although they could rise when forbearance plans expire. Nevertheless, the Consumer Financial Protection Bureau has proposed new rule changes to prevent avoidable foreclosures when federal foreclosure protections expire. Mortgage servicers will have to adapt and follow federal and local laws or risk fines and enforcement actions.

Money transfer and payment processing

Although operating results were challenged in the industry, revenue diversity, cost cutting, and variable expenses led to better-than-expected results, all else equal. In money transfer services, we saw digital growth help offset the weakness from walk-in locations. We expect remittances to rise as economies reopen, and migrants travel for work and vacations.

Future Debt Issuances Likely To Remain Leverage Neutral

As sentiment improves even more, we believe issuers will continue to take advantage of the current low rates before it's too late. However, we believe these issuances will be used to shore up the balance sheet, build liquidity, and manage future maturities as opposed to just adding leverage. Notably, we saw mortgage originators and services use record EBITDA from low rates and mortgage re-financings to shift toward unsecured funding and away from secured financing. Nevertheless, secured funding, and in particular bank funding, remained more resilient for nonbanks than in previous cycles. This is likely in part owing to regulations that required banks to hold more capital, liquidity, and stable funding. Although growing deposits and falling net interest margins likely also played a role.

Though we do not expect it, we will continue to monitor for companies that are over-extended and add leverage in anticipation of an improving economy.

We continue to believe that a well-staggered debt maturity ladder is the best strategy from an issuer credit rating perspective. Over time, as the economy recovers, select companies may opportunistically issue debt for M&A and take advantage of perceived dislocations in valuations of complementary businesses.

Appendix: Nonbank Financial Institutions Debt Maturities

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