A record $1 trillion of junk debt will mature by 2021, leavinghigh-risk companies to hunt for new cash at a time when markets arelikely to be less welcoming, according to Moody's InvestorsService.

Speculative-grade companies have $1.06 trillion of debt maturingbetween 2017 and 2021, with the bulk of it, $933 billion, comingdue after 2019, Moody's said in a report Wednesday. New issuance islikely to rise in the second half of this year to start addressingthose maturities, analysts led by Tiina Siilaberg wrote.

Debt markets aren't prepared to absorb the maturities, accordingto Moody's. Demand for collateralized loan obligations, whichbundle leveraged corporate loans into securities, has fallen fromits 2014 peak, and credit ratings for both bank loans andhigh-yield bonds have deteriorated, according to the report.

“If liquidity dries up, the default rate will be significantlyhigher than the last time around,” Siilaberg said in an interview.“Companies have more debt to deal with, and we've seen a lot ofsmaller companies take on substantial amounts of debt in a low-rateenvironment.”

The backdrop includes potential changes in federal rules andmacroeconomic conditions by 2019 that could make high-yield bondsless attractive. Tighter monetary policy, higher volatility,elevated valuations and unfavorable changes to U.S. tax law couldall contribute to pressure on spreads and underperformance in thesector, according to a separate report from Pavilion GlobalMarkets, the Montreal-based trading and research firm.

Leverage Risk

Companies with higher debt-to-earnings ratios, especially thosewith leverage greater than six times, are more vulnerable,according to Moody's, which said U.S. bank regulators may tightenthe application of leveraged lending guidelines that are designedto curb risk.

More than 30% of the high-yield bonds coming due are rated Caa1or below by Moody's, at least seven levels below investment grade.More than 8% of leveraged loans are rated Caa1 or below, up from5.8% in the equivalent 2016 study. The telecommunications sectorhas the most debt coming due over the next five years, with $81billion.

The study covers debt rated by Moody's and uses informationcurrent as of November.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.