Investment Banking Preparing for a ‘maturity wall’

There’s a lot at stake for companies holding debt as it moves toward maturity. Maintaining access to capital to fund operations is critical for all companies, especially those considering funding a merger and acquisition transaction or having a significant capital expenditure event, like building a new facility or the purchase of new equipment. 

Timing is critical for refinancing debt, Pirouz says, and there are a few reasons why. First, there’s a financial, and therefore reputational, risk of waiting too long to refinance. “There’s a concept called ‘going current,’ where if there’s less than a year until the maturity date, you’re deemed to be current with that debt,” he explains. “Credit rating agencies don’t like for companies to go current with their debt because it means they’re taking too much market-based refinancing risk.”

Additionally, if interest rates have increased since companies last financed, the cost of debt may be higher now, which will need to be accounted for within budgets and forecasts. In this most recent cycle, “credit spreads are relatively tight for most issuers, which helps offset the federal funds rate and relevant treasury yields being higher,” Pirouz notes.

The question companies have to address when dealing with a maturity wall is whether it’s better to refinance now or wait for improved conditions. That’s a difficult one to answer, Pirouz says, and it may be different for every company. That’s why Truist Securities professionals work with clients to determine the timing that’s most suitable to help them meet their goals. There are macroeconomic conditions to consider too. For example, are interest rates projected to rise or decline over the next several quarters? In this most recent iteration of a maturity wall, the Federal Open Market Committee voted to lower the federal funds rate in September, November, and December of 2024. Further cuts are expected to occur in 2025, but not as frequently.^{Disclosure 2}

“Some companies don’t have the luxury to allow that maturity to go current unless they’ve got enough cash on the balance sheet or capacity under their revolving credit facility,” says Pirouz. “If you want to hold onto your cash, you may have to refinance your bonds, even though you may not be enamored with where rates are. We also like to perform liability management analyses to determine the cost benefits of refinancing ahead of scheduled maturities.”

Companies with credit facilities not maturing until the latter part of a maturity wall, on the other hand, may be able to wait longer to see if conditions change. It’s not solely about interest rates, however. Pirouz says the sector the company operates in may impact its strategy depending on that industry’s lifecycle and any headwinds facing it.

“The conversation we have with our clients doesn’t just myopically revolve around their bond maturity,” Pirouz says. “We like to take a step back and talk more holistically about what their strategic objectives are over the next three to five years. We want to understand what their uses of cash are going to be and how much of that will be generated from operations, what is their inorganic growth strategy, informing what they may need to raise in the capital markets.”