Everybody involved in the credit markets wants to know when the cycle will turn. On the one hand, it feels like we are in the later stages of the current cycle and investors are afraid to overstay their welcome. On the other hand, credit spreads are close to historical averages while many competing asset classes seem overvalued. For those who are currently invested in high-yield bonds and leveraged loans, accurately timing the cycle will be the difference between safely clipping coupons and realizing painful losses. And for those of us who specialize in distressed debt investing, the turn of the cycle should create the next great opportunity. Most investors base their high-yield outlook on expected defaults.
Credit strategists and portfolio managers frequently point to the timing of debt maturities – the so-called “maturity wall” – as a major determinant of near-term default rates. Presumably, with fewer debt maturities, there will be fewer defaults, and therefore higher returns. This assumption makes intuitive sense. After all, the inability to pay debts as they come due is a classic definition of insolvency. The more time companies have until their debts mature, the greater the chances they can find a way to refinance. Today, many credit strategists point to the relative lack of near-term high-yield maturities as a reason for investors to be constructive on credit.
To be sure, after years of easy credit, today only a small portion of the high-yield market matures in the next few years, as shown in Exhibit 1.
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