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In mid-February, some investors started their day snapping up the shares of Aston Martin. It wasn\u2019t some turnaround in its consistently loss-making operations that they were cheerful about but\u00a0confirmation<\/a>\u00a0that James Bond\u2019s favorite carmaker was negotiating with bankers to address its debt. For a while, the British firm \u2014 and other junk-rated companies around the globe that borrowed when money was cheap \u2014 had seemed destined to hit a so-called maturity wall, an event that would drive up its interest costs to the point where they could endanger its existence. Instead, it managed to steer clear as red hot demand for corporate bonds is making this wall crumble. Similar maneuvers by its peers are easing worries in many parts of the credit markets.\u00a0<\/p>\n When most corporate bonds are due, they aren\u2019t simply paid off but are rolled over \u2014 that is, the company borrows new money to satisfy the old debt. That\u2019s a problem when interest rates are higher than when the company originally borrowed. It\u2019s especially a problem if many bonds come due the same year. That\u2019s what the term \u201cwall of maturity\u201d refers to \u2014 the potentially damaging need to refinance large amounts of debt at higher costs all at once.<\/p>\n It\u2019s been especially pertinent to the companies that borrow junk bonds, also known as high-yield bonds, in contrast to investment grade bonds issued by companies with better credit ratings. In 2023, a wide range of companies that borrowed in the junk bond market found themselves facing a maturity wall that totaled\u00a0over $750 billion<\/a>. The debt that they had issued when interest rates were historically low during the early stages of the pandemic was coming due. Replacing it at much higher rates would erode their profitability \u2014 or in the worst case they might not be able to refinance at all, which could put their company\u2019s survival at risk. That danger was most acute for money-losing companies with credit ratings that fall in the lower end of the junk spectrum.<\/p>\n Aston Martin\u2019s situation was particularly precarious. The luxury carmaker had been running net losses in the hundreds of millions of pounds over the past several years. It lacked the scale to compete more effectively. And it struggled to maintain a strong balance sheet: In 2022, it announced plans to\u00a0issue new shares<\/a>\u00a0even after its chairman declared the company had enough cash.\u00a0<\/p>\n To top this off, it would need to fork out more than $1.1 billion to repay a bond in 2025 that already required almost $120 million to service each year.\u00a0<\/p>\n The interest rate increases that had created the problem were a reaction to the sharp rise in inflation around most of the world that hit in 2021 in the pandemic\u2019s wake. The situation looked like a double bind for the kinds of companies that issue junk bonds. If inflation stayed high, so would interest rates. If interest rates came down, the expectation was that they would only do so if central banks had slammed on the economic brakes hard enough to cause a recession. And while a recession would lead to lower rates, it would likely be even more painful for high-yield borrowers.<\/p>\n But then conditions unexpectedly eased. Inflation began dropping in 2023 at a rapid pace without significantly slowing many economies, most notably the US\u2019s. Some called it \u201cimmaculate disinflation.\u201d<\/p>\n As a result, raising new money has become much cheaper for companies. The US Federal Reserve, the European Central Bank and other central banks largely finished with rate hikes in 2023 and are now widely expected to start cutting rates this year. In anticipation of those cuts, yields on corporate borrowing have dropped since the highs of last October. And while there\u2019s been a bit of a bounceback since the start of the year in response to better than expected economic data, the risk premiums in corporate bonds \u2014 the extra amount above safe investments like Treasuries that borrowers have to pay \u2014 have kept falling. That\u2019s produced a\u00a0risk-on mood<\/a>\u00a0among investors \u2014 many of whom have piles of cash to put to work.\u00a0<\/p>\n This has reduced refinancing costs to their lowest level since early 2022, a time when central banks had just started their fight against inflation. And companies have taken advantage of it. The amount of near-term debt by junk firms has been on a\u00a0downward spiral<\/a>, breaking down the feared wall of debt. Companies with the lowest-rated traded company debt are benefiting the most: The extra amount in interest they have to pay compared with their investment-grade counterparts \u2014 the spread \u2014 is unusually tight.\u00a0<\/p>\n The amount of debt that needs to be repaid by junk-rated firms in the next four years has declined by a fifth since the beginning of last year, based on data compiled by Bloomberg. More importantly, the imminent maturities of 2024 and 2025 have fallen by more than 40%, alleviating fears of overwhelming payment obligations.<\/p>\n Aston Martin eventually raised $960 million from a bond at 10% that drew $5 billion of orders and another \u00a3400 million that attracted \u00a31.5 billion of investor bids at 10.375%. For both, their final maturity comes due in 2029.\u00a0<\/p>\n This wasn\u2019t a big drop from the 10.5% interest cost of the old note but the deal\u2019s major contribution to Aston Martin\u2019s finances was how it effectively postponed the debt\u2019s repayment from next year to late in this decade when, presumably, its management will have found some way to turn the business around.<\/p>\n Canadian billionaire Lawrence Stroll rescued Aston Martin in 2020 following a disastrous stock market performance after its 2018 listing. He has since carried out multiple capital raises, but the company remained burdened by its debt pile. Stroll\u2019s plan is to launch more sports cars more frequently to boost sales, but it will be a challenge to make a success of a company that\u2019s collapsed seven times in its 111-year history.<\/p>\n There are several reasons to think that more bricks will be removed from the maturity wall going forward. Central banks are expected to start cutting rates later this year. Cash keeps flowing into credit funds. The cost of debt has been declining. And major economies appear to be set to avoid a hard landing that would have sparked a wave of defaults among the most precarious borrowers.<\/p>\n There is a question, though, of whether this solution is just a recipe for new problems down the road. Any of the factors that have led to the easing of fears could sour and destabilize the newfound equilibrium.<\/p>\n But pushing back the debt repayments of an carmaker with a billionaire as executive chairman will do little to allay fears of so-called \u201czombie\u201d firms, which have only been able to stay in business for years due to what\u2019s called \u201cextend and pretend\u201d \u2014 their ability to extend debt with the help of lenders willing to pretend things will be different next time. Zombies remain a concerns, with the topic cropping up again lately as the Japanese central bank\u00a0raised its interest rate<\/a>\u00a0for the first time since 2007. Without a meaningful improvement in those companies\u2019 fortunes, this latest opportunity to postpone debt maturities might only be feeding more of the world\u2019s zombies.\u00a0<\/p>\n<\/div>\n\nHow debt becomes a threat<\/h3>\n
Aston Martin\u2019s challenge<\/h3>\n
The market shifts gears\u00a0<\/h3>\n
The wall moves back\u00a0<\/h3>\n
Aston-Martin\u2019s turn for the better<\/h3>\n
Digging out of debt, or kicking the can?<\/h3>\n
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