In many ways, credit management is a form of risk management. Credit professionals need to be constantly aware of what’s going on in the market, and their debtor’s markets and decisions made in the credit management team can have a big impact on a company’s bottom line.
And, it seems that this part of the job will be increasingly important. It has been predicted that a record-breaking $2 trillion of U.S. corporate debt will be coming due in the next five years, and according to the National Association of Credit Management (NACM), credit professionals should be “on guard and prepare for any contingency”.
Recent reports from Moody’s Investors Service showed that speculative-grade corporations with more than $1 trillion, along with investment-grade firms with almost $1 trillion, face a record amount of debt maturities over the next few years. According to the agency, the market’s capacity to absorb these costs is below average, and it’s expected that issuance in the primary market will start to speed up later this year.
While nearly 60 per cent of speculative-grade companies with debt due in the five-year span are in sectors that Moody’s deems to be stable, some 16 per cent have more negative outlooks, and manufacturing has the highest proportion. Although these numbers are all coming out of the US, it’s important to remember how closely linked its economy is to this side of the Pond – a connection that was made painfully obvious by the 2008 financial crisis.
George Schnupp, global director of credit at Anixter Inc, told the NACM that credit professionals should monitor the debt structure related to the timing of the debt that is coming due. “In other words, the analyst should be aware of what debt is coming due in year one, year two and so on and make sure to include the information on all write-ups.” He added that if the majority of debt is due in the next year or two, analysts should dig deep for information to help them better understand the risks involved.
At least three interest rate hikes are expected in the US this year. This means it will cost more for customers to borrow or fund their businesses through debt. Mr Schnupp says that analysts should pay closer attention to covenants, debt ratios, cash flow from operations and interest coverage.
He also warns that bankruptcies are a particular risk in such an environment. “As interest rates continue to increase, those companies that are operating on slim margins are going to be impacted, and therefore we will see an increase in bankruptcy filings,” he said.
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