By Lee Pacchia
As with any new year, 2024 is full of unknowns that will play out over the course of the coming 12 months, but one unavoidable truth that many companies will encounter is a looming debt maturity wall, as billions in corporate debt come due this year and next. Management teams will be challenged to navigate this reality in the midst of a period of substantial geo-political uncertainty, rising inflation, trade tensions and labor shortages among other considerations.
The concept of a debt maturity wall creating disturbances in the credit markets has been a concern since the financial crisis that began in 2008. While the problems anticipated in each debt wall scare over the past 15 years didn’t necessarily materialize, a confluence of factors this time around could present a unique set of challenges for companies looking to address debt maturities in the next two years. Global conflict, rising interest rates, persistent inflationary pressures, trade tensions, labor shortages and political unrest have all converged to create a unique and compounding threat matrix that will require management teams to prepare multi-contingency response plans in anticipation of sudden changes to capital market dynamics.
In particular, commercial real estate and emerging technology companies have struggled to adapt to life in a post pandemic world. Occupancies for office properties are dropping across the board as remote work takes hold in American society and valuations are in the process of resetting. Likewise, startups and young companies that previously have relied on venture capital and venture debt funding to finance growth-oriented business plans are struggling to adapt to a rising rate environment where investors are demanding a renewed focus on profit. Experts expect companies in these areas to remain under pressure into 2024.
Information flow has changed dramatically in recent years, both in quantity and availability in real time. This development could have a significant impact on behavior. Management teams need to take extra precautions to remain best positioned to react to sudden market developments or other external events impacting operations.
After almost 15 years of ultra-low interest rates, an entire generation of management, investors and lenders haven’t had to deal with a down cycle or tight credit conditions. This lack of collective experience navigating a rising rate environment has potentially left many organizations unprepared to meet today’s challenges. Companies can start to address these issues by admitting that 2023 presents an entirely different reality from the pre-pandemic world and surrounding themselves with teams of experienced advisors who understand the new realities presented by the change in cycle.
Prepare, prepare, prepare. Companies can get ready for the pending maturity wall by proactively addressing debt maturities as they affect their specific circumstance. That means surrounding your organization with the right mix of advisors to help guide the board and management through transition periods; starting the process of addressing debt maturities early enough to account for new layers of scrutiny capital sources are likely to apply; and understanding the need to show a “buttoned up process,” as deals with contingencies or issues are less likely to get done. Even having skeletal outlines of contingency-specific communications plans ready to go in the event of a shift in pathway can save valuable time and energy for boards, management teams and advisors.
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This summary was derived from a webinar jointly hosted by Robinson & Cole and ICR titled “End of an Era: Is There a Debt Maturity Cliff Coming?” and featuring Robinson & Cole Partners Les Levinson and Rachel Jaffe Mauceri and ICR Managing Director Lee Pacchia.