Europe, Asia Refinance Risk Bigger Than in U.S., Barclays Says

By Patricia Kuo

Nov. 17 (Bloomberg) -- Refinancing risk in Europe and Asia exceeds the U.S. in 2009 because more than twice the amount of debt will mature in the two regions than in the world's biggest economy, analysts at Barclays Capital said.

The U.S. dollar bond market has $1.1 trillion of debt due next year, or 9 percent of the amount outstanding, compared with $1.6 trillion, or 17 percent, for Europe and similar proportion of the $5.7 trillion of debt in the Asia-Pacific region, analysts led by New York-based Jack Malvey wrote in a research note today.

More than two-thirds, or $2.7 trillion of the bonds maturing are from governments or government-backed borrowers, which face much less difficulty selling debt than other issuers, according to the report. Corporate borrowers globally must repay $466 billion of bonds in the next four quarters, with $269 billion from financial institutions, Barclays said in the report.

Commercial mortgage-backed securities and European market have refinancing needs ``well in excess of average annual rates and their proportional shares of the debt universe,'' the analysts wrote. ``With investors potentially diversifying away from CMBS after a year of underperformance, this refinancing risk rings very real in commercial real estate.''

Yields on bonds backed by commercial mortgages soared to record highs relative to benchmark interest rates last week after the U.S. government said it won't buy devalued mortgage assets and concern grew that commercial property investments will be hurt by the decline in the economy.

The gap, or spread, on top-rated commercial mortgage-backed securities rose 246 basis points to 869 basis points more than benchmark swap rates during the week, according to Bank of America Corp. data. A basis point is 0.01 percentage point.

The analysts also expect more borrowers to exercise the so- called pay-in-kind options on their bonds to preserve capital. Payment-in-kind allows borrowers to make an interest payment in debt rather than in cash.

``We would expect most issuers to elect to PIK even when liquidity remains ample,'' Barclays analysts wrote. At current prices, ``issuers have an economic incentive to PIK the coupon and use the cash they conserve to buy back the discounted bonds.''

To contact the reporter for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net.