Implications of rising US rates for Australian companies holding US Debt

When the tide goes out all boats are effected. Unfortunately for Aussie corporates with offshore debt, 2016 is shaping as a challenging year in global debt markets. Investment Grade credit spreads (a measure of corporate debt quality) have been widening/cheapening since mid 2014, however, the high yield and leveraged loan markets are now in free fall (see chart 1). Much of this debt is energy and commodity related and faces significant re financing risk as we enter 2016. How did we get here ? This complex is over leveraged in markets that have become badly oversupplied. Not only are interest bills rising (spreads widening), the ability to roll the debt (refinance) forward is becoming altogether problematic with many issuers falling into default (chart 2) Whilst Aussie corporates are generally high quality, their cost of borrowing looks set to continue to rise in offshore markets as lenders remain cautious in the face of rising defaults. See attached: Chart 1 - Leverage Loans, after decaying early in the year are now in free fall, Chart 2: Defaults approaching 2009 levels