U.S. speculative-grade refunding risk for 2006-2008 above average, Moody's says

By Angela McDaniels

Seattle, March 7 - Moody's Investors Service said that refunding risk for rated debt coming due over the next three years is above average because over half of the bonds and credit facilities maturing have low speculative-grade ratings of B1 or below.

The high volume of low-rated new issuance originated during recent years is likely to propel the up-tick projected in the expected default rate throughout the near to intermediate term, according to an agency news release.

Moody's said the combined refunding need for 2006 through 2008 is about $91 billion. This total includes $62 billion of rated bonds, 56% of which have ratings of B1 and below and 20% of which are rated Caa or below.

"Ratings at these levels reflect instruments that are deeply subordinated in weaker capital structures where financial and business risks are probably high," senior vice president Kendra Smith said in the release.

"In general, these instruments are associated with companies whose corporate family rating is likely at or below Ba3, representing the mid to lower tier of speculative-grade ratings. These issues, combined with an expectation of rising interest rates, increase the risk of refinancing."

The $91 billion of speculative-grade debt maturing in 2006 through 2008 is less than the $94 billion Moody's reported for the 2005 to 2007 period.

"In addition to the flurry of early refunding or retirement of debt during 2004 and 2005, remaining maturities in 2006 to 2008 were mostly originated in years with relatively low new issuance," Smith explained in the release.

In all, $19 billion, or 21%, of the $91 billion total is due in 2006, $33 billion, or 36%, is due in 2007 and $39 billion, or 43%, is due in 2008.

Of the combined total, bonds make up roughly $62 billion, or 68%, of the total and committed credit facilities are about $29 billion, or 32%. This compares to $56 billion, or 60%, of bonds and $38 billion, or 40%, of credit facilities reported in Moody's refunding study for the years 2005 through 2007.

The increase in bonds is a byproduct of the growing importance and dominance of rated credit facilities in the speculative-grade markets, the agency said. During the receptive markets of 2004 and 2005, many of the credit facilities that could be refinanced were refinanced, leaving bonds as the bulk of the debt now facing refinancing.

Moody's said that opportunistic refinancings continue to drive the current speculative-grade bond market, with the new bond issuance pipeline at roughly the same level that it was a year ago. The agency also said it is seeing leveraged buyouts pervading the U.S. market, which are typically 100% debt financed and consist predominantly of credit facilities.

By industry, Moody's telecom/media/technology sector and its utilities/energy/natural resources sector share the greatest concentration of debt to be financed in 2006 through 2008 at roughly 22% each, according to the release.

The agency noted that convertible bonds account for only $6 billion of the total $91 billion facing refunding risk over the next three years, a slight rise from the $5.2 billion level reported two years ago.

Moody's detailed its findings in a report titled, "Refunding Needs and Risk for U.S. Speculative-Grade Issuers, 2006 to 2008."

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