A study of U.S. corporate bonds by Standard & Poor’s projects that US$305 billion could be refunded as a result of debt being either called or maturing by year-end 2005.

The vast majority, US$285 billion worth, is maturing corporate debt in various sectors. The other US$20 billion is callable debt that would likely be refunded depending on the interest rate situation.

The S&P study looks at the issue under three possible interest rate yield curve scenarios, finding that the potential for refunding of outstanding corporate debt ranges from a low of 12.5% of outstanding issuance to a high of 13.6%.

Financial companies are likely to experience the greatest rate of refunding, with US$65 billion (18.5% of outstanding issuance) expected to turn over in the market. Banks are a close second with US$53 billion (18.0% of outstanding issuance), S&P said. “The comparatively high rate of refunding within financial companies, almost exclusively from maturing investment-grade debt, is not surprising. The financial sectors tend to issue bonds with shorter terms, leading to a higher rate of maturity. Further, the short maturities reduce interest rate exposure risk and decrease the sectors’ need to issue bonds with call options,” it says.

In terms of volume, industrial bonds will make up the largest component of refunded debt, S&P projects, with US$116 billion (10.4% of outstanding issuance) eligible. However, the utility sector demonstrated the greatest sensitivity to changes in interest rates, with 11.2% eligible for refunding under the high-rate scenario compared with 14.6% under the low-rate scenario. “The heightened interest rate sensitivity of the utility sector stems from its greater need to fund long-term capital-intensive projects,” it says. “The longer maturity of the sector’s debt increases its exposure to interest rate changes, leading to an increased need for embedded call options.”

With investment-grade bond debt constituting 76.9% of outstanding issuance, it is not surprising that the majority of maturing debt will also be mostly investment grade, S&P says. “However, it is striking that it is as high as US$258 billion (90.4% of maturing debt).”

The rating agency says that the disproportionate amount of investment-grade debt maturing will be fueled by the non-financial sectors. “Up until recently, speculative-grade non-financial issuers have been locking in historically low interest rates and extending maturities in anticipation of a rising, albeit measured, interest rate environment,” it says. “This effectively leaves little speculative-grade non-financial debt remaining to term out of the market over the next year and half. Although much of the potentially refunded investment-grade rated debt will also come from the financial sectors, this issuance is expected to mature in the same proportion as outstanding investment-grade financial debt to total financial debt and therefore not contribute to the higher ratio of investment-grade debt maturing.”