Ask any professional in the bank loan industry about the average life of a bank loan, and you’ll likely get a fairly standard response: loans tend to have an average life of about three years. Loans are refinanced for all kinds of reasons, just like a home owner can refinance their mortgage at any time.
But bank loans are still issued with a maturity date, usually seven or eight years from the closing date. That leads to a maturity schedule like the one below, with portions of the S&P/LSTA All Leveraged Loans Index maturing at different times over the coming years.
The maturity schedule above reveals two attributes that are currently favorable for the bank loan asset class.
- The maturity schedule is very, very light in the next few years, which increases the likelihood that defaults will be limited (companies do not default unless they miss a payment, and the payment they are most likely to miss is a maturity).
- The infamous “wall of maturities” discussed so often during the Global Financial Crisis now appears to be a much more manageable path, one that is getting smoother and smoother as time passes.
Why is that?
Just as in the Great Depression, when a generation altered their economic behaviors as a result of having lived through those events, we believe that a generation of Chief Financial Officers has changed after the global financial crisis.
During the crisis, bank loan maturity dates led some to be concerned. With the lending environment constrained, CFOs had to wait until closer to their maturity dates to secure refinancing for their loans.
The chart below shows how the percentage of loans due to mature in 2014 didn’t change much as the years passed between 2007 and 2010, when new issuance was low and refinancing more difficult. The wall of maturities looked threatening from 2007-2009, until the refinancing market opened again in 2010.
Now, however, CFOs have taken a much more active approach to maturity dates, and refinancing activity is a large percentage of new issuance in the bank loan market. Rather than take a chance that a difficult refinancing environment might occur, CFOs are generally choosing to refinance their debt much earlier. They are seeking to take advantage of relatively calm periods, and using these opportunities to move their bank loan maturity dates further and further into the future.
Maturities that had been scheduled for 2018 and 2019 are being refinanced into 2020 and 2021. The orange column below shows that the bank loan index maturity schedule is now spread over a four year period, rather than tightly packed into one or two years.
We believe the active management of maturity schedules is a positive development for the bank loan market.
With a reasonably strong economic backdrop, we expect maturities to move further into the future, with a positive effect on default rates for years to come. Not only will it help companies reduce default risk, but it should also lend stability to bank loan pricing, as loans are typically refinanced at par. However, bank loans, like all credit instruments, are not free from risk. Bank loan investing requires deep understanding of the fundamentals of each company, and there is no substitute for high quality research.
This blog post is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. This information is subject to change at any time without notice.