Corporate Credit Spreads Hit 20-year Lows - Is it Time to Refinance Your Debt?
Credit spreads have narrowed and are near historic lows that have not been seen in almost twenty years. Compressed credit spreads indicate strong investor confidence in the economy and a reduced perceived risk of corporate defaults.
For companies, this environment presents an opportunity to refinance existing credit facilities at more favorable rates, potentially lowering borrowing costs and improving financial flexibility.
Investment-grade margins at narrowest spread in nearly 20-years
Investment-grade corporate bonds currently have a spread of approximately 0.81 percentage points over U.S. Treasuries, which is the narrowest margin since March 2005.
High-yield margins at 17-year lows
High-yield bonds are trading at an average spread of 2.67 percentage points, the tightest in the high-yield market since mid-2007.
Source: St Louis Fed, Financial Times
Why Tightening Credit Spreads Lead to Lower Refinancing Rates
Lower credit spreads indicate that the market perceives lower risk for corporate debt. This tightening often translates to lower borrowing costs for companies because the additional interest cost paid by companies to borrow funds decreases relative to the cost of treasury-bonds. Therefore, by refinancing during periods of narrow credit spreads, companies can lock in lower interest rates, reducing their debt servicing costs and potentially improving their balance sheets.
Overall Rates Remain Elevated
Despite narrow spreads, absolute interest rates remain elevated due to recent monetary policy adjustments. So while the premium over risk-free rates is low, the total borrowing cost may still be higher than in previous low-rate periods. That said, The Conference Board, a global, nonprofit think tank and business membership organization, is projecting a Fed Funds rate to lower to a target range of 3.00-3.25% in 2025, which would indicate an ideal refinancing environment on both an absolute and relative basis.
Fed Funds Effective Rate is Decreasing
Absolute interest rates are higher than a few years ago, but have been decreasing, a trend that is expected to continue in 2025.
Why low credit spreads are appealing for refinancing:
Reduced Interest Expense: Lower credit spreads mean lower interest rates for companies, which directly cut down the cost of debt. This frees up cash flow for reinvestment, dividends, or other operational needs.
Extended Debt Maturity: Companies may be able to extend the maturity of their debt at favorable rates, enhancing their financial stability by reducing the need for frequent refinancing.
Enhanced Cash Flow: Lowering debt payments improves cash flow, which can be beneficial for companies with high capital expenditures or those looking to invest in growth opportunities.
Strengthening Credit Profile: By refinancing at better terms, companies can demonstrate financial prudence, potentially improving their credit ratings and further lowering future borrowing costs.
Operating in an environment where corporate credit spreads are at a 20-year low presents a timely opportunity for corporate debt refinancing that will allow companies to manage debt more efficiently and potentially improve their overall financial standing.
Learn More about Refinancing Debt in 2025
Our team at Keene Advisors has represented a wide range of clients on debt refinancing transactions. Recently, we published a comprehensive primer for CFOs on understanding the complexities of credit facility financing, including best practices for projecting and managing liquidity, typical covenant structures, and guidance on how to negotiate the most competitive terms for your company.
Contact us today to take advantage of tightening credit spreads and to explore refinancing for your organization’s debt.