There’s a sense of increasing fragility in global corporate debt markets.

And for good reason.

Because there’s a massive wall of corporate debt maturing over the next three years – with most held by companies near-or-already-at speculative credit ratings.

Or – putting it another way – there’s a serious amount of ‘BBB’-rated debt (aka the last rung on the investment grade ladder and just one step above a ‘junk’ rating) coming due by 2026.

And this is happening at a time when borrowing costs have risen sharply (courtesy of Federal Reserve tightening) and as corporate earnings are sinking. (I wrote more here on the global earnings recession).

These ‘BBB’-rated companies are essentially at the margin – and a single credit downgrade would send them into the junk-debt swamp. (Aka ‘fallen angels’ – those that fell from investment-grade grace and into the depths of junk).

This is a dangerous position for corporations as they’re currently squeezed between a rock and hard place (higher debt costs and declining profits).

Let me explain. . .

Global Corporate Debt Maturing Over The Next Three Years Is Very Troubling

Now – according to S&P Global Ratings Research – there’s about $6.5 trillion in global corporate debt maturing over the next 36 months.

This amounts to roughly 30% of all global corporate debt outstanding (which is around $23 trillion).

That means debt maturing is rising around 350% between now and 2026.

But making matters worse is the amount of junk-rated debt that’s maturing.

For instance, there’s currently $51 billion of ‘B-‘and-lower (junk) debt maturing in the next 12 months.

But this accelerates over the next three years – tripling by 2024 ($165 billion). And then more than doubles from there in 2026 ($380 billion).

Thus – over the next 36 months – more than one-fifth (21%) of all debt maturing is junk-rated.

This is a sharp acceleration of debt coming due.

And most of these corporations – the junk grade debtors (‘BB+’ and below) – will face greater refinancing costs if rates stay higher and credit tighten furthers. (Which I expect is the case – read more here).

Now, I know what you may be thinking.

“That’s a lot of debt. But still, junk-rated debt maturing is only 21% of the total maturity pie and is three years away.”

That’s true. This isn’t an overnight problem (yet still a problem nonetheless).

But what I believe is showing greater fragility is the huge amount of ‘BBB’-rated debt that’s coming due in this same period.

Because these corporations are just one downgrade away from entering the junk bond swamp. . .

There’s A Massive Amount Of Debt Held By Companies One Step Away From A Junk Rating

It’s clear that over the last year, global growth momentum has deteriorated in the face of declining fiscal stimulus, depleting pandemic-era savings, and Fed tightening (read more here).

There’s essentially no momentum to the upside in growth.

And because of this, corporate earnings have come under pressure.

According to Goldman Sachs – U.S. corporate profits will decline sharply, seeing their biggest drop since the COVID peak.

The GS strategists’ note reads, “. . . if analyst projections are realized, this quarter will represent the trough in S&P 500 earnings growth.  Materials (-32%) and Health Care (-20%) expect to report the largest earnings declines. . . . Communication Services (-18%) and Info Tech (-16%) stocks also expect to announce dramatic EPS declines despite recent surging share prices of some of these sectors’ largest constituents. . .”

Meanwhile, borrowing costs have soared since the Fed began forcing up short-term interest rates. Especially for U.S. high-yield debt (what the speculative/junk companies borrow at).

Thus declining earnings – and the sharp increase in interest payments (causing a widening gap in borrowing costs between investment grade issuers and junk grade issuers) — have sparked worries over further credit downgrades.

To put this into perspective – according to Fitch Ratings – North American non-financial corporate rating downgrades exceeded upgrades by 1.6x during Q4-2022. (That’s up from 0.5x in the prior year’s period),

This marked the second straight quarter where corporate rating downgrades exceeded upgrades (reversing a six-quarter trend).

And it’s not just smaller corporations. . .

For instance, earlier in March, S&P Global downgraded Nissan’s credit rating. Sending them into junk.

Now many fear this is the beginning of a ‘fall angel’ cycle. Which could push as much as $55 billion in corporate debt into junk territory.

And this is a big deal.

Because – as I mentioned above – most non-financial corporate debt is held by ‘BBB’-rated corporations (one step away from junk).

In fact, the ‘BBB’ category accounts for the largest share – roughly 45% – of debt maturing in the next 24 months. This compares to just 23% for the ‘A’ category.

S&P Global also notes that utilities and autos hold the largest share of nonfinancial sector debt maturing over the next 24 months.

So, it’s clear there’s quite a wall of near-junk (‘BBB’-rated) debt outstanding and maturing in the next 36 months.

And since most of these firms are near junk already, they most likely won’t have enough cash available to repay their creditors.

Thus they’ll require new debt to repay old debt (aka refinance).

But here lies the problem: the cost for junk-rated firms to borrow is significantly higher than historic averages.

Thus if more downgrades occur, these ‘fallen angels’ must borrow in the high-yield credit market (what junk issuers pay). Putting them even closer to potentially defaulting.

Also, many institutional investors – such as pensions firms, insurance firms, etc – can’t legally hold anything besides investment-grade debt. Meaning that money managers would quickly dump any debt that’s downgraded into junk. Causing further stress in the high-yield market.

But making matters worse, a wave of defaults and bankruptcies has surged recently.

For instance – in Q1-2023 – U.S. junk bond defaults have already surpassed the full-year totals of 2021 and 2022 combined.

And according to S&P Global – U.S. bankruptcy filings hit a 12-year high in the first two months of 2023.

Keep in mind that these were defaults and bankruptcies before Silicon Valley Bank blew up. Which triggered bank issues across the world. And will most likely have an effect on banks’ and investors’ willingness to extend credit to marginal-rated corporations.

Either way, there’s a great risk for further downgrades in corporate debt as both a credit crunch and sinking earnings amplify.

So – in summary – there’s a significant amount of debt coming due over the next 36 months. But it’s happening in the face of both declining economic conditions and diminishing corporate earnings.

Making matters worse, there’s an enormous amount of ‘BBB’-rated debt outstanding. And a single downgrade would plunge them into the junk debt market. Causing their borrowing costs to soar as investors shed their collateral.

Putting it simply – the corporate bond market risks choking on all these potential fallen angels.

Don’t feel surprised if it eventually does.