Investment bank Morgan Stanley recommends corporate bond investors favor investment-grade, high-yielding bonds heading into next year, as a wave of maturities poses risk to a larger number of companies rated “junk”.
Morgan Stanley said it believed the Federal Reserve was nearing the end of its rate-hiking cycle, and that a soft landing for the economy was expected next year.
Still, if the majority of junk bonds maturing in 2023 have done so successfully, an additional $73 billion is expected to mature over the next 18 months, Morgan Stanley said in a report released Friday. Over the next six months, this amount is expected to reach $125 billion.
Low-quality bonds maturing next year will likely need to be refinanced at an interest rate 125 to 250 basis points higher than their current level, the bank added.
Unlike borrowers, who have seen interest costs rise steadily, high-yield bond issuers will face a greater ‘price shock’, with higher coupons, the report’s authors note.
The picture is bleaker for lower-quality junk bond issuers.
Between a fifth and a quarter of borrowers rated B3/B- by Moody’s and S&P have average interest coverage less than 1x. As maturities arrive next year, 15% to 20% of this rating category is likely to be downgraded to CCC, according to Morgan Stanley.
The downgrades will not be limited to junk issuers, Morgan Stanley added. The bank said it expects between $75 billion and $100 billion in rating downgrades among high-quality companies rated A to BBB, Moody’s lowest investment grade.
“The leverage of IG companies is historically high, in the range of 2.25 to 2.30 times,” the report notes. “Without the post-Covid peak, these would be historic highs.
Regarding leveraged loans, Morgan Stanley said it expects a return to loan origination next year for leveraged M&A and corporate buyouts, supported in part by anticipated Fed rate cuts.
“Excluding refinancing, we expect $130 billion to be placed in the TLB market for acquisitions and GCPs/recaps,” the report’s authors write.
“While banks’ appetite for lending may be slow to recover, the (largely syndicated loan) market should benefit from Fed rate cuts.
2023-11-21 05:04:54
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