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Announcement:

Moody's: U.S. Non-Financial Corporates' Refunding Needs Approach $1.3 Trillion Through 2015

Global Credit Research - 01 Feb 2011

New York, February 01, 2011 -- Over the next five years, U.S. nonfinancial companies face about $1.3 trillion in maturing debt, says Moody's Investors Service in its latest refunding reports. The total represents an improvement of only roughly $100 billion from last year's $1.4 billion total despite approximately $800 billion in debt issuance in 2010.

While Moody's views the refunding risk investment-grade companies face as benign, the companies have been accumulating cash, which will likely increase event risk as the companies look to deploy this cash towards more shareholder-friendly activities or increased merger & acquisition activity.

Most of the maturities over the next five years—$690 billion of the $1.3 trillion—is speculative-grade debt, with speculative grade corporate bonds totaling approximately $275 billion and speculative-grade bank credit facilities totaling about $415 billion.

Moody's views speculative-grade companies as remaining vulnerable to potential shifts in market sentiment. "As long as the credit markets continue to function 'normally,' or close to it, we think the market will be able to absorb the looming $690 billion speculative-grade maturity wall," said Kevin Cassidy, Senior Credit Officer at Moody's Investors Service and one of the authors of the two reports.

Of the $690 billion speculative-grade debt maturing over the next five years, about $130 million is rated Caa1 or lower. "These are the obligations most at risk," said Tiina Siilaberg, Analyst at Moody's and co-author.

Maturities for speculative-grade companies are back-end weighted over the next five years, with a very modest $26 billion due in 2011, $67 billion due in 2012, $136 billion due in 2013, a staggering $280 billion due in 2014 and a more modest $184 billion due in 2015. "However, we believe some speculative-grade bank credit facility maturities will be 'pulled-forward,' sharply increasing near-term refunding needs," said Siilaberg. "This 'pull-forward effect' refers to the propensity of companies to refinance their entire bank credit facility when only one debt instrument is maturing, and it could add $166 billion to the current $148 billion in refunding needs in 2011-2013," she said.

Speculative-grade debt has been issued at a robust pace over the last year and a half, and average annual issuance over the last ten years is almost $500 billion. "However, the looming maturity wall could run into trouble if credit markets slow down," Cassidy said. "The sluggish economic recovery, high unemployment rate, and the possibility of rising interest rates are key risk factors, especially for lower-rated debt."

"The so-called crowding-out effect from burgeoning maturities of various governments and financial institutions are also risks," Cassidy added. Even though governments and financial institutions typically have very different investors, the credit markets have proven to be highly sensitive over the last few years to extraneous shocks. For example, in the spring of 2010, the sovereign debt crisis in Greece significantly slowed down the speculative-grade credit markets in the United States.

Ten companies account for close to $110 billion of the total speculative-grade refunding needs. Topping the list are Texas Competitive Electric Holdings Co LLC (Caa2, negative), First Data Corporation (B3, stable), and HCA Inc. (B2, positive), all of which were bought by private equity firms in leveraged buyouts at the height of the credit bubble.

Four of the top 10 speculative-grade maturities are rated Caa2 or below—Texas Competitive Electric, Caesars Entertainment Corp. (Caa3, positive), Realogy Corp. (Caa2, positive), and HD Supply Inc. (Caa2, negative).

Refunding risk, as measured by market access and ratings, has gotten better over the past two years for speculative-grade and investment-grade companies, with companies' intrinsic liquidity improving and the U.S. economy continuing to recover, said Moody's.

Maturing investment-grade debt faces far less risk than speculative-grade debt, partly because its credit quality is stronger, cash balances higher and annual maturities are more evenly weighted to around $110 billion, with the exception of $144 billion due in 2013.

Investment-grade companies have accumulated healthy amounts of cash since the financial crisis. As of the second quarter of 2010, cash balances exceeded maturing debt over the next five years by roughly $130 billion, providing a cushion in the event of a sudden credit shock. "However, as investment-grade companies become more optimistic about the future of the economy, event risk will likely increase. Companies could begin to engage in more share repurchases, pay higher dividends and increase merger and acquisition activity, all of which could weaken credit metrics and pressure ratings," Cassidy said.

The telecom, technology and media industries are heavily represented in both speculative-grade and investment-grade debt maturities because of several large issuers and the sectors general stability in cash flow.

This is the thirteenth year that Moody's has written reports on refunding needs and risks for speculative-grade companies and the third year for investment-grade companies. The new reports are the second in Moody's ongoing annual reviews of refunding risk that look at a five-year window, rather than the three-year periods as studied by previous reports.

The two reports—"Refunding Risk and Needs for U.S. Speculative-Grade Corporate Issuers, 2011-2015," and "Refunding Risk and Needs for U.S. Investment-Grade Corporate Bond Issuers, 2011-2015"—are available at www.moodys.com.

* * * * *

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

New York
Kevin Cassidy
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Tom Marshella
MD-US and Amer Corporate Fin
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: U.S. Non-Financial Corporates' Refunding Needs Approach $1.3 Trillion Through 2015
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