The notorious wall of maturities revisited

In finance, the “Maturity Wall” is a near-mythical beast conjured up to scare small children, skittish investors and chief financial officers into pulling the trigger on bond sales.

It’s scary because the maturity wall — the shape formed by a bar chart that shows the years when corporate bonds are due for repayment — always seems to climb sharply and augur a rash of defaults.

We say near-mythical because the shape of corporate bond maturities always looks a bit like an unscalable wall, and it has never produced the car crashes that doomsayers have been predicting when flourishing the chart (at least in isolation).

Eg, this from Standard & Poor’s last month, with a classic headline that could have run any time since the dawn of the bond market: “Ballooning maturity wall a growing risk for speculative-grade companies.”

All that said, this time could be different. Really!

The recent pace and scale of the interest rate increases and the resulting bond market carnage means that rolling over those debts is at the very least going to be a lot more expensive.

Even the bonds of the diminishing club of triple-A rated US companies now have an average yield of 4.85 per cent. That’s more than what junk-rated companied had to pony up just two years ago. And those riskier bonds now have an average yield of 8.35 per cent.

At the very least, this means that more companies will have to devote more of their revenues to cover the rising interest expenses, and this will have an impact on investments and hiring, Goldman Sachs warns.

Its economists point out that a lot of companies have taken advantage of the low yield era to issue longer-maturity bonds, with a terming-out refinancing splurge particularly apparent in 2020-21. Goldman Sachs estimates that over the past three decades the duration of corporate debt has roughly doubled.

That means the share of corporate bonds — both junk and investment grade — that need to be repaid or refinanced over the coming two years has fallen from 26 per cent in 2007 to 16 per cent today, despite a huge increase in issuance.

However, debt maturities jump from $790bn in 2024 to over $1tn in 2025, and that is when companies are really going to notice the bite of higher rates.

You can see how the shift in coupon payments might look like from this nifty Goldman chart.

Using granular data on public companies going back to 1965, Goldman Sachs’ economist Ronnie Walker and Sienna Mori estimate that each additional dollar of interest expense forces companies to lower their capex by 10 cents and labour costs by 20 cents (about half of which comes from reduced employment and half of which comes through lower wages).

Moreover, companies are carrying an exceptionally high level of cash, which could soften the impact. The net result is that the notorious maturity wall could prove much less of an issue than you might think.

. . . Higher interest expense could reduce capex growth by 0.10pp in 2024 and 0.25pp in 2025 and labour cost growth by 0.05pp in 2024 and 0.15pp in 2025. The reduction in labour costs from lower employment growth translates to a roughly 5k drag on monthly payrolls growth in 2024 and a 10k drag in 2025. The combined drag on GDP growth from these channels is likely relatively modest. We estimate they total a less than a 0.05pp drag on annual GDP growth in 2024 and a 0.10pp drag in 2025 (assuming a 0.7 MPC for the reduction in labour costs).

In principle, these impacts are already accounted for in our financial conditions framework. However, the limited refinancing needs since the start of the Fed’s tightening cycle suggest that the impact of higher interest rates on growth is more delayed than the average historical impact that our FCI impulse model projects.

There is one important caveat, however.

Goldman’s report highlights the sharp, secular increase in the number of unprofitable companies since the 1980s, with almost half of all publicly listed ones unable to turn a profit in 2022.

In other words, some companies are definitely going to find the maturity wall a bit more challenging to surmount. You can read the full Goldman Sachs report here.