- As a follow up to his 2023 blog post titled “Commercial ABS Debt Maturity Wall: Die Another Day," Senior Research Analyst Scott Hofer is back with an update on refinancing risk for ABS with balloon payment structures
- As interest rates remain stubbornly high, our analysis indicates that ABS Past Due¹ could more than double by the end of 2026 to over $10 billion
- Some ABS sponsors now face a moment of truth: inject equity into their deals, or let low coupon bonds languish in refinancing limbo
- At IR+M, we prioritize refinancing risk in our analysis given the inherent limitations of structured finance ratings
The perfect refinancing storm
It may seem hard to imagine, but just five years ago homebuyers in the United States could secure a mortgage at under 3.0%, the U.S. Treasury could lock in long-term financing at just 2%, and ABS issuers with high leverage and balloon style repayment features could achieve yields as low as 1.5% on novel securitizations. This accommodative rate environment enticed a variety of issuers to access the capital markets, with ABS being the market of choice for deals backed by long-dated contracts that could be securitized into highly rated tranches of debt.
Fast forward to today, and the easy money times of 2020 – 2021 seem like a distant memory. Bond yields for certain ABS have more than doubled, creating problems for key performance metrics such as Debt Service Coverage² and Excess Spread³. Making matters worse, the long-dated nature of the ABS collateral contracts – once viewed as a credit positive – have failed to keep up with the dramatic spike in interest rates, creating an asset/liability mismatch as 5 – 7 year Anticipated Repayment Date (“ARDs”) come due. These factors have created a ‘perfect storm’ for certain ABS issuers that took on debt at rock-bottom rates in 2020/2021, with some surprising results: deals with long-dated contracts and highly-rated tenants have underperformed some shorter, higher-yielding asset classes with a larger buffer against rising rates.
Refinancing risk revisited: ratings and collateral performance no longer leading indicators
Heading into 2025, refinancing risk was largely confined to the Whole Business Securitization (“WBS”) and Aircraft Leasing ABS sectors, both of which faced credit-related headwinds due to the COVID-19 pandemic. While interest rates may have played a role on the margin, the deals that failed to refinance in the years leading up to 2025 suffered steep reductions in top-line revenue, resulting in ratings downgrades well in advance of ARDs.
Just recently, a third sector—Triple-Net Lease ABS—entered the ‘Past Due’ category. Unlike the Aircraft and WBS deals that failed to refinance before it, however, poor collateral performance did not precede the missed payment. Indeed, the $1.4bn of bonds that failed to be refinanced in July of 2025 carried relatively high ratings of ‘A+’ and ‘A-’, with an outlook of ‘stable’. Rather than credit-related stress, high financial leverage and a spike in debt servicing costs were the main reason for the failed refinancing— signaling that bond structure and refinance-ability had become key risks for ABS bond buyers. While failure to refinance an ABS at its Anticipated Repayment Date does not impact a bond’s structured finance rating, it nonetheless has big implications for bond pricing and duration, as bondholders now face a payment window that can stretch decades beyond the ARD⁴.
At IR+M, we prioritize refinancing risk in our underwriting process as this sets the highest bar for deal performance. Cash Trapping and Rapid Amortization triggers are often set meaningfully below the required Debt Service Coverage for issuing refinancing debt, providing a false sense of cushion within the deal – particularly those with high structured finance ratings but excruciatingly long repayment timelines post ARD.
Exhibit 1: Outstanding balance of ABS Past Due over time ($ mm)
Source: Bloomberg. Includes over $500mm of Class C Aircraft ABS tranches with original ratings below BBB- that remain outstanding beyond their Expected Final Payment Dates.
Exhibit 2: Balloon-Payment ABS coming due through 2026
Source: Bloomberg
Refinancing risk through 2026: An additional $5bn+ at risk
As interest rates continue to remain stubbornly high, we believe that an additional $5bn+ of Triple-Net Lease ABS could face refinancing issues through 2026, with other borrowers with balloon repayment features potentially facing stress as well. Issuers in the Data Center, Cell Tower Leasing, and Fiber ABS sectors are not immune to refinancing risk, although to date issuers in these sectors have avoided missing ARDs thanks to crafty deal structuring and the addition of more assets to the trust. Indeed, issuers in these sectors have managed to stave off higher rates by gradually adding more collateral to the pools and laddering ARDs, which have simultaneously increased cash flow and lowered the deal’s sensitivity to rates. In addition, “Springing Amendments” have been introduced on new series of debt, loosening the covenants tied to allowable Debt Service Coverage and the very definition of “Debt Service Coverage” itself⁵. Taken altogether, these actions have reduced the maturity “wall” to a manageable amount and provided issuers with additional runway, keeping borrowers true to their anticipated repayment schedules. The ability to add assets and slowly adjust the cost of debt to market rates has been key, as these sectors also employ relatively high financial leverage. Which leads us to our closing thoughts on this issue…
The Moment of Truth: Inject Equity, or send bond prices tumbling downward
Issuers that have failed to ladder their ARDs, add assets to the trust, and even-out the cost of debt now face a ‘moment of truth’: inject equity into the deals, or let low-coupon bonds languish in refinancing limbo. At today’s interest rates, the Debt Service Coverage Ratio on many deals issued in 2020/2021 would collapse, putting the issuance of refinancing debt in violation of bond covenants and rating agency criteria. Furthermore, asset values for many types of Commercial Real Estate have fallen over the last few years, making asset sales a non-viable path to reducing debt.
The only solution to properly de-levering many of these deals, outside modifying coupon rates/ARDs, is to replace a portion of the debt with equity to prop up the Debt Service Coverage (and simultaneously decrease the Loan-to-Value ratio). While sponsors of ABS have no obligation to inject equity given the non-recourse nature of the deals, it has seemingly become the only feasible path to “fixing” these over-levered transactions. Time is of the essence, as subordinated Post-ARD Step Up Interest⁶ starts to accrue after the ARD, which can effectively prevent the deal from de-levering and becoming refinanceable in the future.
Will securitization sponsors use their own equity to refinance their ABS deals, or let low-coupon bonds tumble in price as repayment windows extend? Perhaps ABS sponsors will build equity in a different manner – by buying back their bonds at a steep discount to par, and cancelling out the Post-ARD Step Up Interest on the debt they own.
The question then becomes, how low do bond prices have to go, and when could a debt buyback take place? Stay tuned as the drama unfolds…
Exhibit 3: Select Triple-net Lease ABS Bond Pricing: Last 12 months
¹“Past due” herein refers to Asset-Backed Securities that remain outstanding beyond their Anticipated Repayment Date, as well as Class C Tranches from Aircraft ABS that remain outstanding beyond their Expected Final Payment Date.
²“Debt Service Coverage” refers to the ratio of net collateral cash flow to debt servicing costs. Typically, the Debt Service Coverage Ratio (“DSCR”) for Commercial ABS needs to exceed a minimum ratio between 1.5x and 2.0x to enable the issuance of refinancing debt.
³“Excess Spread” refers to the interest generated on the collateral (net of fees) less interest costs on the debt. Excess Spread can comprise a significant portion of overall credit enhancement in an ABS and is commonly referred to as “soft enhancement”, in contrast to overcollateralization or “hard” enhancement.
⁴ABS bonds are rated to a “Legal Final Payment Date” that can stretch several decades beyond the Anticipated Repayment Date. Once an ABS passes its ARD, all residual cash flows are re-directed from the issuer to pay down the debt. Structured Finance ratings reflect the likelihood of bondholders being paid in full by the Legal Final, not the ARD.
⁵‘Debt Service Coverage’ for many ABS deals now can refer to a Senior-only Debt Service Coverage Ratio, which excludes Class B interest and scheduled principal (where applicable).
⁶ Post-ARD Step Up Interest is fully subordinated in the payment waterfall to both senior and subordinated bond principal, and therefore has equity-like features. It accrues at a minimum rate of [5]% and is incentivize issuers to refinance their deals before the ARD
