Julius Caesar was famously assassinated on the Ides of March and Shakespeare further immortalised it in our memories with ‘Beware the Ides of March’. But, this specific day (March 15) was also a deadline for settling debts in Roman times (Caesar paid the ultimate price).
March 15 isn’t far away. Amidst the current Covid-19 induced volatility, will high yield companies be able to settle their debts? What companies are at risk of ‘assassination’ by a slowing global growth backdrop and a refinancing window that can snap shut for highly risky issuers in times of market stress?
Highly risky companies with debt maturing in the next 12-18 months will currently be assessing the sustainability of their capital structures. It’s hard to say that global growth was on a very positive trajectory before the virus outbreak intensified, and it’s certainly going to be weaker now. Issuers facing structural headwinds who already had rising debt burdens and shrinking margins will suddenly find their problems accelerating. And with the degree of ‘covenant-lite’ documentation (not just in the loan market) recoveries may be lower in restructuring scenarios as the potential for value leakage has increased.
However, despite the virus volatility, the Ides of March for 2020 are likely to be largely uneventful in terms of unexpected restructurings. Companies have been doing a good job in easy financing conditions at pushing out their maturities; in the Bank of America Merrill Lynch US and Euro CCC-rated and lower indices, there are no debt maturities until March 2021. Looking ahead, the 2021 and 2022 maturity walls start to look a little scarier for those invested in companies just limping along. Of course, maturity walls and turnaround runways are key considerations in our credit analysis.
In our all-maturity high yield strategy, the nearest bond maturity is still more than two years away and that certainly isn’t the riskiest credit we own. We typically target issuers who will clearly be able to exist beyond their next bond maturity. We like stable, free-cash-flow-generative businesses that we are comfortable holding through market volatility. No assassinations expected here.
Meanwhile, passive strategies are lending to the highly risky and the less risky alike. They are, of course, just allocating increasing amounts to the most indebted companies. Beware the (next) Ides of March.