Wells Fargo Analysts See Big Refinance Risk in `Bad Boy Bonds'

“Bad boys, bad boys whatcha gonna do? Whatcha gonna do when [the rating agencies] come for you?”

So begins Wells Fargo’s note Wednesday on the potential refinance risk lurking in the part of the global investment-grade market that’s grown most since the financial crisis: BBBs. Or, in their team’s alliterative phrasing, the bad boy bonds.

U.S. corporate bonds that fall into this category, which is just above junk status, have lost 2.5% this year for investors, nearly the worst among slices of the investment-grade market.

(Related: Corporate Bonds Are Getting Junkier)

Faced with an economic expansion that’s getting long in the tooth and short-term interest rates grinding steadily higher, things could go from bad to worse for this behemoth of the bond market.

To this end, credit strategists Nathaniel Rosenbaum and Winifred Cisar compiled a list of 21 global firms that have at least 50% of their debt maturing in the next five years, thinking that these issuers might be forced to raise capital in a particularly unfavorable environment.

“Using the consensus assumption that the U.S. is due for a recession in the next few years, companies with front-loaded maturity schedules are more likely to have debt ‘in the wrong place at the wrong time,’” wrote Rosenbaum and Cisar. “We encourage investors to pare positions in BBBs with exposure to macroeconomic headwinds, such as the Autos, which have become the beta sector for trade war-related headlines.”