"Within the expected interest rate scenario, financial companies are likely to experience the greatest rate of refunding, with US$65 billion expected to turn over in the market," noted Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "Banks are closely following with US$53 billion." 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.
In terms of volume, industrial bonds will make up the largest component of refunded debt, with US$116 billion (10.4% of outstanding industrial 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. The longer maturity of the sector's debt increases its exposure to interest rate changes, leading to an increased need for embedded call options.
The report, titled "Refunding of U.S. Corporate Bonds in 2004 and 2005," is available on RatingsDirect, Standard & Poor's Web-based credit research and analysis system. The report can also be found on Standard & Poor's public Web site under Press Room in the top navigation bar, select Hot Topics then Global Fixed Income Research/Global Default and Recovery. Members of the media may request a copy by contacting Marc Eiger at (1) 212-438-1280