High Yield: Scaling the Maturity Wall
The maturity wall facing high yield bond issuers has garnered much attention. But given the market’s short duration profile, lower prices and higher-quality relative to history, the reality facing issuers is less daunting.
Maturity walls, which represent the maturity schedule of the aggregate market, are capturing the attention of media and investors alike. In the high yield bond market specifically, the elevated level of interest rates has raised questions about the ability of issuers to refinance their existing, low coupon debt. While these concerns are real, we believe they may be somewhat overblown—and overshadow potential total return opportunities that are compelling in the wider fixed income world.
Key Characteristics of the Market Today
There are good reasons for persistently high interest rates to cause concern when it comes to high yield bonds. Namely, higher funding costs can make it challenging for issuers to refinance maturing debt, especially when financial conditions or fundamentals are stretched. In some instances, issuers could be facing a doubling or even trebling of interest costs to maintain the same level of balance sheet debt, which would materially impact cash flows. This could lead to an increase in distressed situations and, in extreme cases, defaults. However, the composition of the high yield market has changed in recent years—and those changes may help to minimize the potential for worst-case outcomes.
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