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Credit risks are building but borrowers aren’t extending maturities

Amend-and-extend arrangements were flat in Q1 this year. There were only 31 such cases compared with 32 in the previous quarter and 35 in Q1 2021.

All in all, a fat, juicy nothingburger. Especially considering that over half (55%) of these related to the revision of the benchmark from LIBOR to SOFR—the new secured overnight financing rate. Essentially, these were made on a technicality, rather than any need on the part of borrowers to stave off looming maturities.

This was also before the Fed turned full hawk, which meant companies were able to benefit from lower costs on their amended loans. When Macy’s, for example, extended the maturity on its US$3 billion revolving credit facility by 33 months to March 2027, the margin lowered by 150bps.

What does this mean for corporates coping with the rising cost of debt and considering their options?

1/ Everyone is expecting the tight squeeze to get even tighter

While nerves were already beginning to fray in March because of the war in Ukraine and acknowledgement by the Fed that inflation was proving to be more stubborn than first thought, the equities bear market had yet to be confirmed. The 75bps hike, the biggest base rate increase in nearly three decades, was still months away.

Currently, credit markets are feeling more tense, especially at the leveraged end of the spectrum. A survey carried out by S&P between June 17 and June 27 shows sentiment has rapidly deteriorated. According to 56% of respondents, the worst is yet to come for volatility in leveraged credit markets. That’s a more than 50% increase on the 35% who said the same in Q1.

2/ In the glass half full category, things could be worse

That’s the bad news. Overall, however, investors are relatively optimistic. Corporates spent 2021 refinancing like crazy amid the low-rate environment, pushing their maturities out en masse.

Leveraged finance professionals expect loan default rates to rise, from a close to historic low of 0.21% in May to between 1% and 1.49% a year from now. That’s a swift rate of change, but still well below the long-term average of 2.77%, the 4% mark being briefly breached during the worst of the pandemic.

All in all, borrowers are sitting pretty. That refinancing push in 2021 is paying off and is likely to keep amend-and-extends relatively low.