With numerous bonds coming to maturity in the new year, investment bank Morgan Stanley wants investors to nix lower-rated bonds in favor of much better investment-grade and high-yielding bonds. This is despite the successful maturation of a number of junk bonds this year.
In a report issued on Friday, November 17th, Morgan Stanley analysts pointed out that around $73 billion in junk bonds will be maturing within a couple of years, and the amount could balloon to $125 billion in the next six months.
The analysts behind the report say that high-yield bond issuers may face significant sticker shock from higher coupons compared to loan borrowers who, this year, have seen a steady increase in interest rates.
But if 2024 looks bleak enough for high-yield players, what awaits those who issued lower-quality junk bonds?
Broad-spectrum Downgrades
It is estimated that the average interest coverage of around up to a quarter of B3 or B minus-rated borrowers identified by both Moody’s and the S&P amounts to less than 1x.
With numerous bonds maturing in 2024, up to 20% of those in this rating class could find themselves facing a downgrade.
But Morgan Stanley officials are quick to advise that junk issuers won’t be the only ones facing downgrades. In fact, it expects up to $100 billion in downgrades even among A-rated firms, as well as those sitting on the lowest BBB investment tier.
With regard to leveraged loans, the authors of the report expressed hope in a return to loan issuance for mergers and acquisitions next year, as well as leveraged buyouts driven by possible rate cuts on the part of the Federal Reserve.
They added that, while the appetite for bank lending may not necessarily go back to pre-pandemic levels anytime soon, the bulk of the loan market is expected to benefit from such cuts.
