The looming US refinancing wall is reshaping both credit risk and investment opportunities for institutional investors, according to US-based hedge fund manager CastleKnight.
Senior partner Dustin Shapir said a wave of US corporate debt maturities is driving a surge in liability management activity and creating a more complex environment across global credit markets.
“I think the wall peaks in 2028. But in practical terms, I don’t really view it as a single cliff. It’s more of a rolling maturity schedule. What you’ve seen over the past several years is companies have been pretty good at pushing out maturities whenever market conditions allow for it – extending maturities when they can,” Shapir told Investor Daily.
The refinancing wall is already reshaping risk across sectors, with software companies emerging as a key pressure point.
“It’s really a case-by-case issue. People are aware of the maturity wall. For example, in software, a lot of companies refinanced or raised new debt several years ago, and now those maturities are approaching,” he said.
“At the same time, there’s a more negative narrative around software companies, which creates challenges. A lot of the stress being discussed in private credit is tied to software investments. Because of those issues, you could see some contraction in credit availability elsewhere too. That’s where the refinancing wall can have broader knock-on effects across the market.”
Shapir said this refinancing cycle differs from previous periods for two key reasons.
“What makes this cycle different is really twofold. First, rates were extremely low in 2020, 2021 and 2022. So as companies look to refinance now, the cost of debt capital is materially higher, and that puts pressure on cash flows and equity valuations. The speed at which rates increased is a major factor,” he said.
“Second, a lot of companies were acquired using inflated earnings metrics during the COVID disruptions. Consumer businesses and supply chain-driven businesses, for example, were generating unusually strong earnings at the time, and companies were leveraged against those elevated earnings at very low rates.”
Now, however, earnings have normalised while funding costs remain elevated.
“That’s clearly an issue. But when we say ‘issue’, it’s not necessarily a problem for everyone. Higher rates primarily pressure the equity because they reduce cash flow and make refinancing harder.
“We think it’s important for investors to remain flexible and view maturity events as catalysts – opportunities to potentially extract incremental economics and improve recovery outcomes through negotiations.”
While Shapir does not believe markets are underestimating the maturity wall overall, he said headline credit indices are masking growing dispersion beneath the surface.
“When we look at trading prices and yields for specific credits with upcoming maturities, I think the risk is generally reflected appropriately.
“But it’s important to note that at the index level – whether you’re looking at high yield or leveraged loan indices – those spreads don’t fully reflect the dispersion underneath. Once you dig into the underlying credits, companies with maturities one or two years out are often trading at meaningfully wider spreads and higher yields,” he said.
For Australian institutional investors with offshore exposure, the implications are becoming increasingly difficult to ignore.
“The US refinancing wall isn’t a distant issue .. it impacts credit spreads, equity valuations, private credit marks and private equity markets. Australian investors with offshore exposure are directly affected because this is ultimately a global cost-of-capital issue,” Shapir said.
He warned that Australian investors could face heightened risks due to significant allocations into US private credit managers and private equity funds, particularly as higher funding costs begin to pressure equity valuations.
“A lot of Australian capital has flowed into US private credit managers and private equity funds. That creates direct exposure … it’s important to remember that the refinancing wall is primarily an equity issue. When the cost of capital rises, equity values are usually the first thing to reprice lower.
“Australian investors with private credit and private equity exposure should absolutely be paying attention to this environment.”
Over the next 12–24 months, Shapir said chief investment officers and asset allocators should prioritise flexibility when selecting managers.
“Managers who can invest across the full spectrum of credit, from performing to stressed to distressed situations, and who understand restructurings.
“They should also look for managers who analyse equities as well, because many important credit catalysts first emerge in the equity market.”
He added that managers focused solely on performing credit may struggle to maximise value during restructurings or maturity negotiations.
“The best managers can negotiate from a position of strength because they’re willing and able to own and restructure businesses if necessary.”
CastleKnight itself has been repositioning portfolios in response to the changing environment, reducing credit exposure in favour of equities where it sees stronger risk-reward opportunities.
“Around 12 months ago, roughly two-thirds of our portfolio was in credit and one-third in equities. Today, that has largely reversed. Our credit exposure has fallen materially because we don’t want to chase credit opportunities if we see better risk-reward elsewhere in equities.”
The firm is also selectively taking positions linked to geopolitical dislocations in the Middle East, including US fertiliser companies benefiting from supply disruptions and higher commodity prices.
“The Middle East conflict has pushed oil prices higher, which has benefited some energy credits.
“Certain commodity and materials businesses are also benefiting because supply disruptions in the region are affecting production and exports,” Shapir said.
“On the flip side, companies that consume those raw materials are facing margin pressure, which hurts earnings, increases leverage and raises refinancing risk.”
According to Shapir, the biggest risk to credit markets would be another sharp rise in rates driven by resurging inflation.
“Right now, consensus expectations don’t anticipate that. But if inflation were to reaccelerate and the Federal Reserve had to raise rates again, that would be a major shock to capital markets.
“Higher-quality businesses would still likely have access to financing, even if borrowing costs increased. But more marginal borrowers could face unsustainable interest costs, potentially leading to Chapter 11 restructurings or liability management exercises,” he said.
Still, Shapir said there remains a scenario where the maturity wall proves less disruptive than feared.
“If inflation stays contained and rates don’t move significantly higher, the maturity wall could ultimately end up being a non-event.”
