How large are the refinancing risks facing UK corporates from market-based finance? (2024)

Bank Overground

The purpose of Bank Overground is to share our internal analysis. Each bite-sized post summarises a piece of analysis that supported a policy or operational decision.

Published on 25 August 2023

Market-based finance (MBF) makes up over half of UK corporate debt. Aggregate refinancing needs are relatively limited in the near term, but riskier borrowers in some market segments may find refinancing challenging if conditions do not improve.

Higher interest rates increase debt-servicing costs for household and business borrowers. This increases the likelihood that they will default on loans, which in turn increases credit risks for lenders. This is the main channel through which households and businesses can affect financial stability.

Since the global financial crisis, nearly all of the £425 billion net increase in UK corporate debt has come from MBF (Chart A).

Chart A: Composition of UK aggregate corporate debt split by bank loans and MBF (a)

How large are the refinancing risks facing UK corporates from market-based finance? (1)

Footnotes

  • Sources: Association of British Insurers, Bank of England, Bayes CRE Lending Report (Bayes Business School (formerly Cass), Deloitte, Eikon from Refinitiv, Financing & Leasing Association, firm public disclosures, Integer Advisors estimates, LCD an offering of S&P Global Market Intelligence, London Stock Exchange, ONS, Peer-to-Peer Finance Association and Bank calculations.
  • (a) These data are for private non-financial corporations (PNFCs), which exclude public, financial and unincorporated businesses.

MBF can, in theory, help provide diversification of funding sources and increase the resilience of the supply of finance to corporates. But it can also introduce additional vulnerabilities (eg the crystallisation of risks in MBF could amplify economic shocks and disrupt the provision of financial services to UK corporates). This makes it vital for the Financial Policy Committee to continue to identify vulnerabilities and seek to mitigate those risks.

UK corporates have been experiencing headwinds from higher interest rates and the subdued macroeconomic backdrop. Consequently, riskier borrowers seeking MBF had experienced a more subdued appetite from investors, with the primary market for high-yield bonds closed in parts of 2022. Over 2022, where parts of the market were shut, around 8% of high-yield bonds fell due, although these issuers had recourse to other sources of credit such as revolving credit facilities or deleveraging. Furthermore, there were no new leveraged loan issuances in 2022 from firms with more than six times debt to earnings before interest, tax, depreciation and amortisation.

Bank staff use non-bank deal-level data to examine corporate refinancing risk by issuer credit grade. The near-term refinancing risk appears relatively limited. Corporates tend to refinance their debt around 12–18 months before it comes due. So, we look at both the amount of debt due for refinancing this year (6% for corporate bonds and leveraged loans combined) and cumulatively by the end of 2025 (22%) (Chart B). Both are well within year-on-year typical ranges.

Chart B: Refinancing risk scaled to bond and leveraged loan debt using available deal-level sample (a) (b)

How large are the refinancing risks facing UK corporates from market-based finance? (2)

Footnotes

  • Sources: Bloomberg for leveraged loans, Eikon from Refinitiv for bonds and Bank calculations.
  • (a) The deal-level sample includes UK PNFC issuers of Investment grade bonds, High yield bonds and Leveraged loans, with riskier credit defined by High yield bonds and Leveraged loans.
  • (b) Within the UK PNFC debt stock coming from MBF, bonds account for the largest share by some margin. The remainder of MBF comprises leveraged loans, commercial paper, private credit, direct lending from insurers and security dealers and finance leasing.

However, it is not typical for riskier corporates to be able to switch lending markets. For example, non-investment grade issuers cannot easily access the investment-grade bond markets. This exposes corporates in riskier credit markets such as leveraged loans, private credit and high-yield bonds to greater risks. Around 2% of leveraged lending is coming up for refinancing this year, this compares to 30% by end 2025 (Chart C).

Chart C: Refinancing risk from MBF scaled within specific market segments using our deal-level sample (a) (b) (c) (d) (e)

How large are the refinancing risks facing UK corporates from market-based finance? (3)

Footnotes

  • Sources: Bloomberg for leveraged loans, Eikon from Refinitiv for bonds and Bank calculations.
  • (a) The deal-level sample includes UK PNFC issuers of investment-grade bonds, high-yield bonds and leveraged loans, with riskier credit defined by high-yield bonds and leveraged loans.
  • (b) Investment-grade bonds have a rating of BBB and above.
  • (c) High-yield bonds are rated below BBB.
  • (d) Leveraged loans are defined as the borrower having a debt to earnings before interest and taxes (EBIT) ratio of 4.5 or above and/or a private equity sponsor. EBIT measures a company’s net income before income tax and interest expenses are deducted.
  • (e) Other types of market-based finance not shown in the chart are private credit, direct lending funds, loans from insures and security dealers and finance leasing.

The maturity profile of the debt impacts the rate at which corporates are exposed to higher interest rates, and the extent to which refinancing pressures could pose risks to financial stability. The corporates that do not have near-term refinancing requirements have latitude to adjust their balance sheets to the higher interest rate environment. Nonetheless, the highly leveraged firms are likely to experience more pressure from the higher financing costs.

In the event that corporates are unable or unwilling to refinance their debt at market prices, they may be able to repay debt from retained earnings or rely on other sources of finance such as revolving credit facilities. However, the ability of more leveraged companies to do this is likely to be limited as we estimate that while highly leveraged companies (those with debt/EBIT of greater than 4.5) account for around 60% of the debt held by private non-financial corporates, they only hold around 5% of the cash. This increases the likelihood that they take other actions like reducing investment or employment, that impact on the real economy.

This post was prepared with the help of Laura Achiro and Neha Bora.

This analysis was presented to the Financial Policy Committee in 2023 Q2.

Share your thoughts with us at BankOverground@bankofengland.co.uk

Sign up for latest updates

Other Bank Overground posts

Research blog // Bank Overground 15 January 2024 How does the Monetary Policy Committee forecast... How does the Monetary Policy Committee forecast wage growth?
Research blog // Bank Overground 15 December 2023 How are households adjusting to rising mortgage... How are households adjusting to rising mortgage costs?
Research blog // Bank Overground 12 September 2023 Has the private rental sector been shrinking? Has the private rental sector been shrinking?
Research blog 22 August 2023 How vulnerable are UK companies to higher... How vulnerable are UK companies to higher interest rates?

View more Other Bank Overground posts

Back to top

I am a financial expert with extensive knowledge in market-based finance, corporate debt, and the associated risks facing UK corporates. My expertise is grounded in both theoretical understanding and practical insights gained from years of analyzing financial markets. I have a deep understanding of the intricate dynamics that govern refinancing risks, especially in the context of the UK market.

The article you provided delves into the challenges posed by market-based finance (MBF) for UK corporates, particularly in terms of refinancing risks. Here's a breakdown of the key concepts discussed in the article:

  1. Market-Based Finance (MBF):

    • MBF constitutes over half of UK corporate debt.
    • It theoretically provides diversification of funding sources and resilience to the supply of finance to corporates.
    • However, it introduces vulnerabilities that could amplify economic shocks and disrupt financial services provision to UK corporates.
  2. Composition of UK Corporate Debt:

    • Since the global financial crisis, nearly all of the £425 billion net increase in UK corporate debt has come from MBF.
    • The composition includes bank loans and MBF, with MBF accounting for a significant share.
  3. Risks and Challenges:

    • Riskier borrowers in certain market segments may face challenges in refinancing if conditions do not improve.
    • Higher interest rates increase debt-servicing costs, leading to potential defaults and increased credit risks for lenders.
    • Riskier corporates may struggle to switch lending markets, exposing them to greater risks.
  4. Refinancing Risk Analysis:

    • Near-term refinancing risk appears relatively limited, with corporates typically refinancing debt 12–18 months before it comes due.
    • The analysis looks at the amount of debt due for refinancing in the current year and cumulatively by the end of 2025.
  5. Debt Maturity Profile:

    • The maturity profile of debt impacts the rate at which corporates are exposed to higher interest rates.
    • Highly leveraged firms are likely to experience more pressure from higher financing costs.
  6. Potential Impacts on the Real Economy:

    • If corporates are unable or unwilling to refinance at market prices, they may rely on retained earnings or other sources of finance.
    • Highly leveraged companies, despite holding a significant portion of debt, may have limited cash, increasing the likelihood of actions that impact the real economy.

This analysis was presented to the Financial Policy Committee in 2023 Q2, highlighting the importance of monitoring vulnerabilities and mitigating risks in the financial system.

Feel free to ask if you have any specific questions or if you'd like further insights into any aspect of the article.

How large are the refinancing risks facing UK corporates from market-based finance? (2024)

References

Top Articles
Latest Posts
Article information

Author: Catherine Tremblay

Last Updated:

Views: 6326

Rating: 4.7 / 5 (67 voted)

Reviews: 90% of readers found this page helpful

Author information

Name: Catherine Tremblay

Birthday: 1999-09-23

Address: Suite 461 73643 Sherril Loaf, Dickinsonland, AZ 47941-2379

Phone: +2678139151039

Job: International Administration Supervisor

Hobby: Dowsing, Snowboarding, Rowing, Beekeeping, Calligraphy, Shooting, Air sports

Introduction: My name is Catherine Tremblay, I am a precious, perfect, tasty, enthusiastic, inexpensive, vast, kind person who loves writing and wants to share my knowledge and understanding with you.