In mid-February, some investors started their day snapping up the shares of Aston Martin. It wasn’t some turnaround in its consistently loss-making operations that they were cheerful about but confirmation that James Bond’s favorite carmaker was negotiating with bankers to address its debt. For a while, the British firm — and other junk-rated companies around the globe that borrowed when money was cheap — had seemed destined to hit a so-called maturity wall, an event that would drive up its interest costs to the point where they could endanger its existence. Instead, it managed to steer clear as red hot demand for corporate bonds is making this wall crumble. Similar maneuvers by its peers are easing worries in many parts of the credit markets.
How debt becomes a threat
When most corporate bonds are due, they aren’t simply paid off but are rolled over — that is, the company borrows new money to satisfy the old debt. That’s a problem when interest rates are higher than when the company originally borrowed. It’s especially a problem if many bonds come due the same year. That’s what the term “wall of maturity” refers to — the potentially damaging need to refinance large amounts of debt at higher costs all at once.
It’s been especially pertinent to the companies that borrow junk bonds, also known as high-yield bonds, in contrast to investment grade bonds issued by companies with better credit ratings. In 2023, a wide range of companies that borrowed in the junk bond market found themselves facing a maturity wall that totaled over $750 billion. The debt that they had issued when interest rates were historically low during the early stages of the pandemic was coming due. Replacing it at much higher rates would erode their profitability — or in the worst case they might not be able to refinance at all, which could put their company’s survival at risk. That danger was most acute for money-losing companies with credit ratings that fall in the lower end of the junk spectrum.
Aston Martin’s challenge
Aston Martin’s situation was particularly precarious. The luxury carmaker had been running net losses in the hundreds of millions of pounds over the past several years. It lacked the scale to compete more effectively. And it struggled to maintain a strong balance sheet: In 2022, it announced plans to issue new shares even after its chairman declared the company had enough cash.
To top this off, it would need to fork out more than $1.1 billion to repay a bond in 2025 that already required almost $120 million to service each year.
The market shifts gears
The interest rate increases that had created the problem were a reaction to the sharp rise in inflation around most of the world that hit in 2021 in the pandemic’s wake. The situation looked like a double bind for the kinds of companies that issue junk bonds. If inflation stayed high, so would interest rates. If interest rates came down, the expectation was that they would only do so if central banks had slammed on the economic brakes hard enough to cause a recession. And while a recession would lead to lower rates, it would likely be even more painful for high-yield borrowers.
But then conditions unexpectedly eased. Inflation began dropping in 2023 at a rapid pace without significantly slowing many economies, most notably the US’s. Some called it “immaculate disinflation.”
As a result, raising new money has become much cheaper for companies. The US Federal Reserve, the European Central Bank and other central banks largely finished with rate hikes in 2023 and are now widely expected to start cutting rates this year. In anticipation of those cuts, yields on corporate borrowing have dropped since the highs of last October. And while there’s been a bit of a bounceback since the start of the year in response to better than expected economic data, the risk premiums in corporate bonds — the extra amount above safe investments like Treasuries that borrowers have to pay — have kept falling. That’s produced a risk-on mood among investors — many of whom have piles of cash to put to work.
The wall moves back
This has reduced refinancing costs to their lowest level since early 2022, a time when central banks had just started their fight against inflation. And companies have taken advantage of it. The amount of near-term debt by junk firms has been on a downward spiral, breaking down the feared wall of debt. Companies with the lowest-rated traded company debt are benefiting the most: The extra amount in interest they have to pay compared with their investment-grade counterparts — the spread — is unusually tight.
The amount of debt that needs to be repaid by junk-rated firms in the next four years has declined by a fifth since the beginning of last year, based on data compiled by Bloomberg. More importantly, the imminent maturities of 2024 and 2025 have fallen by more than 40%, alleviating fears of overwhelming payment obligations.
Aston-Martin’s turn for the better
Aston Martin eventually raised $960 million from a bond at 10% that drew $5 billion of orders and another £400 million that attracted £1.5 billion of investor bids at 10.375%. For both, their final maturity comes due in 2029.
This wasn’t a big drop from the 10.5% interest cost of the old note but the deal’s major contribution to Aston Martin’s finances was how it effectively postponed the debt’s repayment from next year to late in this decade when, presumably, its management will have found some way to turn the business around.
Canadian billionaire Lawrence Stroll rescued Aston Martin in 2020 following a disastrous stock market performance after its 2018 listing. He has since carried out multiple capital raises, but the company remained burdened by its debt pile. Stroll’s plan is to launch more sports cars more frequently to boost sales, but it will be a challenge to make a success of a company that’s collapsed seven times in its 111-year history.
Digging out of debt, or kicking the can?
There are several reasons to think that more bricks will be removed from the maturity wall going forward. Central banks are expected to start cutting rates later this year. Cash keeps flowing into credit funds. The cost of debt has been declining. And major economies appear to be set to avoid a hard landing that would have sparked a wave of defaults among the most precarious borrowers.
There is a question, though, of whether this solution is just a recipe for new problems down the road. Any of the factors that have led to the easing of fears could sour and destabilize the newfound equilibrium.
But pushing back the debt repayments of an carmaker with a billionaire as executive chairman will do little to allay fears of so-called “zombie” firms, which have only been able to stay in business for years due to what’s called “extend and pretend” — their ability to extend debt with the help of lenders willing to pretend things will be different next time. Zombies remain a concerns, with the topic cropping up again lately as the Japanese central bank raised its interest rate for the first time since 2007. Without a meaningful improvement in those companies’ fortunes, this latest opportunity to postpone debt maturities might only be feeding more of the world’s zombies.
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