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The squeeze is on

18 December 2023 |
Active ESG
The new year promises to be a challenging one for highly levered corporates with looming maturities. Who will be hardest hit?

Fast reading

  • Corporates face the double whammy of a lacklustre economy and muted earnings.
  • With yields likely to stay relatively high through 2024, corporates looking to refinance can also expect a higher cost of capital.
  • This presents a challenging scenario, particularly for highly levered corporates which typically make up the CCC part of the market.

When considering our outlook for the coming year, it’s fair to say that not all the signals are flashing green.

For one thing, the macroeconomic backdrop remains lacklustre. Rates may no longer be rising but the effects of the recent hiking cycle continue to filter through to the real economy. Key macro data underline this: Eurozone manufacturing PMIs came in at 43.8 for November, indicating still-tough conditions for Q4 reporting for European industrials. Likewise, the big Chinese post-pandemic reopening was one of 2023’s bigger disappointments. As things stand, we don’t expect material change in the coming 12 months.

Looking into 2024, markets have shown optimism over October and November, but even the so-called ‘goldilocks’ scenario of a soft landing implies it will be slow growth rather than anything more benign that will be the limiting factor on inflation. The ‘best-case’ scenario, then, is essentially the economy slowing just enough to temper inflation without falling into recession.

In short, we’re faced with an unstable equilibrium. If the economy stays too strong then inflation likely remains too high and central banks will likely disappoint on cuts in 2024. If the cooling is too strong then the economy risks a more damaging recession scenario.

What does this mean for fundamentals?

This year we have seen a hit to earnings. This is due to a mixture of destocking effects from the post-Covid bullwhip, which dampened volumes, coupled with cost inflation that is still hurting margins. Companies are now in a battle to cut costs against a persistent backdrop of destocking and weak industrial demand.

Though the Federal Reserve may start lowering rates next year, we’re still a long way from the ‘cushy’ low rate environment of the past decade, and this is putting the squeeze on both consumers and corporates – and impacting the cost of funding.

Even though corporates in the high yield market have, by definition, a fixed rate on their debt, this only lasts as long as their maturities. When it comes to refinancing, we can begin to expect some sticker shock on new coupons as they come through.


c.28% of CCC bonds are due by 2026

Excluding a short period of market volatility in 2020, average yields in the high yield index haven’t been this high since the 2016 commodity crisis. Given how yields are likely to stay relatively high through 2024, those borrowers who do need to refinance through to 2025 will face higher funding rates, materially increasing their interest levels.

This, along with the muted earnings due to the macroeconomic factors outlined above, makes for a high yield double whammy. Because of this, we believe interest coverage metrics will be on a downward trend, particularly in Europe.

The challenge for stressed/distressed credit

For the highly levered corporates who typically make up the CCC part of the market the macro-economic backdrop is particularly challenging. Corporates with material maturities before 2026 will need to start addressing these over 2024 to avoid this debt becoming ‘current’.

In short, the continued higher rate environment leaves little tolerance for missteps and exposes these corporates to potentially falling into the ‘distressed’ bucket of issuers with spreads in excess of 1,000bps.


EUR HY Interest Coverage Ratio (ICR)


Already, as of end of November 2023, dispersion of CCCs is at the 68th percentile.1 With central banks not incentivised to ramp up the pace of cuts unless there is significant macroeconomic weakness (a situation which would also not be favourable to typical CCC corporates), this implies the tough funding environment for CCCs is likely to persist into 2024.

Given the uncertainty around access to affordable borrowing rates, we remain cautious on those CCC credits which have high refinancing needs without material catalysts to help raise liquidity. These HY issuers may have to fall back on distressed exchanges or asset sales to start to address the maturity wall, with significant execution risk.

For more on what the coming year might bring, read our full series of 2024 outlooks.

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