Maturity wall fears overblown but isolated incidents will occur

Concerns about an imminent maturity wall presenting risks to private credit markets are slightly overblown, according to industry insiders.

But there are some companies that will face challenges.

“This idea of an imminent maturity wall is not something to be very concerned about in the near term,” Bill Cox, global head of corporate, financial and government ratings at KBRA told Alternative Credit Investor.

Although there have been warnings from central banks and rating agencies about risks due to upcoming maturities, the credit ratings agency found that only 10 to 15 per cent of total loans in the market are set to mature over the next two years. The group analysed more than 1,800 middle market private credit borrowers representing over $750bn (£591bn) of debt.

Cox said that there will probably be incidents of companies running into some trouble, but these will be isolated.

“For companies whose loans are maturing, some of those companies certainly are going to be facing a much higher interest rate environment which means their refinancing is going to come at lower valuations, all else being equal,” he said. “There is a minority of companies that haven’t grown as much and maybe will be challenged in a refinancing environment to get the amount of debt.”

Interest coverage is particularly being suppressed in the software sector, Cox pointed out, with companies starting now to feel the pressure, leading potentially to difficult conversations between sponsors and lenders. In some cases, lenders are happy to take the keys unless sponsors put more equity into companies.

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“In the situations we hear about or have been involved with, it seems like the lender has consistently had a very strong position to assert their rights,” Cox said.

Property woes

Specific concerns have been highlighted around the beleaguered commercial real estate sector, with around $2tn-worth of these loans in the US maturing over the next couple of years. However, some industry stakeholders think that these fears are overhyped.

“A lot of those loans that matured last year ended up getting extended, so lenders are now experienced in extensions,” said one commercial real estate debt executive at an asset management firm.

“The loans that we’re seeing that are refinancing were originated in 2014 with coupons of around 4.5 per cent, so it’s not a huge increase for them to go to 5.5 per cent or six per cent, particularly when they’ve had 10 years of opportunity to increase cash flow on the property.”

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Being proactive

Although in the near-term, upcoming maturities should not lead to widespread defaults, there are a significant number of maturities coming due between 2026 and 2028. However, KBRA believes that borrowers will be proactive in refinancing their debt, and the percentage of loans coming due in those years should also decline over time.

While the percentage of defaults has not been significant so far, that is against a much larger base of loans than the industry had in any previous cycle, according to Cox. And that means that it is a significant number of companies that are defaulting.

This could put a bit of pressure on lenders as they will be dealing with a larger number of borrowers in trouble. In Cox’s opinion, one of the big risks in the market is therefore, a “human capital risk”. Private debt groups will need more people to deal with workouts and special situations.

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