Refinancing needs look manageable for nonfinancial companies rated speculative-grade ('BB+' or lower) by S&P Global Ratings in North America (in this article limited to the U.S. and Canada) as well as Europe, the Middle East, and Africa (EMEA) through 2023, after many companies actively reduced upcoming debt maturities. However, risks persist--particularly for lower-rated companies. Not only do these issuers generally have fewer funding options, but growing risk aversion amid market volatility and rapidly shifting financing conditions could exacerbate their refinancing risk and funding costs.

While less than 20% of speculative-grade companies have debt maturing over the next 18 months, issuer-specific risks remain below the surface of broadly manageable maturities. This small share of companies includes 127 companies rated 'B-' or lower, many of which are highly exposed to rising inflation and lingering effects of the pandemic.

Overall Refinancing Risk Looks Contained

Upcoming North American speculative-grade maturities appear particularly manageable, with the total from July 1, 2022, through Dec. 31, 2023, more than 60% lower than the average annual issuance volume of the past decade. And in EMEA, maturities through 2023 are about 33% below the average annual issuance volume--implying challenging issuance conditions will not necessarily create refinancing problems.

However, with the marked reduction in issuance this year, investors' refinancing concerns have grown. Leveraged finance issuance (including leveraged loans and speculative-grade bonds) through May was down by nearly 58% in the U.S. and by 68% in Europe; these year-over-year comparisons are stark following record issuance in 2021. Yet refinancing risk looks contained even if the current slow pace of issuance were to continue. Issuance in the U.S. year to date totals $224 billion, which is approaching the maturing debt total of the next 18 months ($228 billion) (see chart 1).

Chart 1

North American companies are better positioned, in general, than those in EMEA, where leveraged finance issuance stalled as the Russia-Ukraine conflict erupted and has yet to resume in any meaningful manner. Through May, European leveraged finance issuance has averaged about €7.8 billion per month (down from a €24.8 billion monthly average over the same period in 2021). Even though this pace of issuance is markedly lower than in prior years, if it continues, it would still provide enough new debt funding to refinance the €83.8 billion in speculative-grade debt scheduled to mature from EMEA nonfinancial companies in 2023 (see chart 2).

Chart 2

While the new issuance totals in both regions look supportive, refinancing is a case-by-case endeavor, and the ability to refinance will depend on individual issuer fundamentals and the state of overall financing markets. In both regions, investors are clearly becoming more selective--seeking both higher quality and higher risk premia. Amid the uncertain conditions, some issuers have also stepped back from the market, preferring to wait on the sidelines in hopes or expectation of better financing costs ahead.

Although refinancing demands appear broadly manageable, rising funding costs present headwinds. Companies' outstanding debt was predominantly issued when benchmark interest rates were lower (or even negative for European issuers). Now that the U.S. Federal Reserve has already begun to raise policy rates and the European Central Bank has announced plans to begin next month, borrowers face higher debt service costs. Borrowers with fixed-rate debt will begin to feel the pinch of rising costs as existing debt approaches maturity and is refinanced at higher rates, while floating-rate debt service costs will rise once benchmark rates exceed their floors.

Chart 3

Most debt maturing through 2023 is investment-grade (rated 'BBB-' or higher). Just 26% of the debt maturing in this period is from speculative-grade issuers, but this debt is riskier and can be more challenging to refinance. In North America, where a higher proportion of issuers are speculative-grade, 30% of the maturing debt through 2023 is from speculative-grade borrowers, while the share is lower, at 22%, in EMEA. Within the speculative-grade category across both regions, less than one-quarter of the debt maturing through 2023 is rated at the lowest rating levels of 'B-' and lower.

Regional Vulnerabilities

Even as the overall amount of speculative-grade debt maturing over the next 18 months remains low (as a share of total debt and recent issuance volumes), refinancing risk is case-specific, and lower-rated borrowers that rely on capital market financing would likely be the most susceptible to challenges if they needed to borrow from debt markets during times of market stress or volatility.

North America

For North America, we reviewed 1,554 nonfinancial corporate issuers with speculative-grade issuer credit ratings and rated debt.

A smaller share of the lowest-rated issuers have debt maturing in this period. Just 3% of North American nonfinancial issuers rated 'B-' or lower have debt maturing through the end of 2022, and through the end of 2023, the share rises to only 15%.

To put this into context, the number of issuers rated 'B-' or lower with debt maturing through first-quarter 2023 (at 23) is less than the number of issuers projected to default (57) in our most recent baseline U.S. trailing-12-month speculative-grade default forecast through March 2023. Furthermore, even with this projected number of defaults, the default rate would still remain below its long-term average of 4%. (Note, however, that defaults would not be limited to missed principal or interest payments; other credit events, such as distressed exchanges, are also included in our default measures.)

EMEA

For EMEA, we reviewed 603 nonfinancial corporate issuers with speculative-grade issuer credit ratings and rated debt.

Only 5% of nonfinancial issuers rated 'B-' and lower from EMEA have debt maturing through the end of 2022. Through the end of 2023, the share rises to 22%.

Just 16 EMEA issuers rated 'B-' or lower have debt maturing through first-quarter 2023. As in the U.S., this is less than the tally of issuers (24) projected to default in our most recent baseline European trailing-12-month speculative-grade default forecast through March 2023. Even with this projected number of defaults, the default rate would return to near its long-term average of 3.2%.

Sector Vulnerabilities

While maturities overall may seem manageable, taking a more granular view by sector reveals a few concentration risks. Chart 4 plots sectors by the number of issuers rated 'B-' and lower with maturing debt through 2023 and by the amount of that debt that's scheduled to mature over the next 18 months.

Chart 4

Consumer-focused businesses (media and entertainment and consumer products in particular) account for the largest number of 'B-' and below issuers with debt maturing through the end of 2023. Elevated risk is to be expected, to some degree, in sectors such as these with relatively large numbers of lower-rated issuers. Furthermore, the lingering business impact of the pandemic, plus the rising impact of inflation on consumers, adds to the headwinds facing consumer-focused businesses.

The media and entertainment sector is also the largest by debt amount, with the maturities of issuers rated 'B-' or lower totaling $11.3 billion over the next 18 months. These maturities are largely distributed among the leisure and business services subsectors. However, refinancing risk is potentially mitigated by the sheer number of issuers in the sector, with lower average amounts of maturing debt by issuer.

Meanwhile, sectors with fewer issuers but larger amounts of debt maturing could indicate more concentrated refinancing risk. For instance, the telecommunications sector has nearly as much debt maturing through 2023 as the media and entertainment sector, but from far fewer issuers.

Risk Is Individual

Even amid the current market turmoil, refinancing demands in both North America and EMEA appear manageable overall. However, below the surface, individual issuer risks remain, especially among companies exposed to slowing consumer demand. With no certainty about how long primary market volatility may last, and given the narrow proportion of the lowest-rated issuers with debt maturing over the next 18 months, refinancing vulnerabilities appear more idiosyncratic than systemic.

Data Approach

For this article, we reviewed the debt (including bonds, notes, and term loans) of nonfinancial corporate issuers rated 'BB+' or lower. The data is based on these issuers' debt instruments that were outstanding on Jan. 1, 2022, and that were rated at the time by S&P Global Ratings. Because of normal data-reporting lags, some of the debt instruments included in this study might have already been paid down or refinanced. We excluded revolving credit facilities from this analysis.

Related Research

• The U.S. Speculative-Grade Corporate Default Rate Could Reach 3% By 2023 As Risks Continue To Increase, May 19, 2022
• The European Speculative-Grade Corporate Default Rate Could Rise To 3% By March 2023, May 18, 2022
• Credit Trends: U.S. And European Refinancing: Strong Issuance In 2021 Fueled Lengthening Maturities, Feb. 28, 2022
• Global Refinancing--Companies Position For Rising Rates By Lengthening Maturity Walls, Feb. 3, 2022