March 9, 2020 / 8:16 PM / 21 days ago

UPDATE 1-Energy bonds under stress as default risk rises

(Rewrites throughout, adds prices, quotes)

By Kate Duguid and Karin Strohecker

NEW YORK/LONDON, March 9 (Reuters) - Energy bonds were hard hit in Monday trade, as investors speculated that the oil price slump could increase the risk of corporate defaults across the industry in 2020 and have repercussions beyond the energy sector alone.

Energy companies were already struggling due to high debt loads and lower-than-expected returns on investment that have made investors nervous. Coming into 2020, many operators in the big shale fields in Texas and other U.S. states were already planning on reducing spending.

The oil price slump on the back of Saudi Arabia’s move to slash its official price piles further pressure on the sector, with the S&P energy sector touching its lowest level since 2004.

All but two of the 50 worst performing bonds of the day come from the energy sector, led by a 6.875% January 2020 Oasis Petroleum Inc bond that has lost roughly half its value since Friday and was trading at less than 27 cents on the dollar.

Deutsche Bank strategist Craig Nicol predicted the latest events would cause “carnage” in the U.S. high-yield market.

“The big question though is contagion to the broader high-yield market outside of energy,” Nicol wrote in a note to clients. “In our view it is inevitable.”

High-yield exchange-traded funds, investment vehicles which track the broad U.S. corporate junk bond market, slumped, with the SPDR Bloomberg Barclays high-yield ETF at its lowest since February 2016, as investors have pulled out of risky debt.

The spread of a credit derivatives index which is widely used as a barometer of sentiment on U.S. high-yield corporate debt surged on Monday to the highest since 2012 as the sell-off in stock markets gathered pace, triggering worries about financial stability.

The widening spreads show investors anticipate cash-flow and refinancing challenges for companies with external debt maturing in the coming months.

Kingsview Asset Management portfolio manager Paul Nolte said the energy bond sell-off was driven by fears that energy sector defaults would start to rise this year.

“The energy decline is piling on. So now what you have with much lower oil prices is a heightened possibility that you are going to see defaults in some of the energy sector bonds, and I think that’s what has got the equity markets concerned, that this can go on for a while as OPEC tries to figure itself out,” the Chicago-based fund manager said.

There is $18.2 billion in corporate debt in the oil and gas sector due to mature in the next three months, according to Reuters calculations, and most of these issuers are ratings watch negative or on review for possible downgrade.

Among those being hard hit on Monday were Nabors Industries Ltd, QEP Resources Inc, Cenovus Energy Inc , SM Energy Co, Chesapeake Energy Corp, Whiting Petroleum Corp, Antero Resources Corp, Occidental Petroleum Corp and Gulfport Energy Corp among others.

S&P said the sector’s bond issuance in 2019 was worth $8.8 billion, which was down from $23.1 billion a year earlier and $31.6 billion in 2017.

“If this drop-off continues, the sector could face heightened stress in paying off upcoming principal payments, which we estimate total about $5.5 billion in 2020 and $11.8 billion in 2021,” the S&P report said. (Reporting by Kate Duguid, Karin Strohecker, Scott Murdoch and Stanley White; Editing by Simon Cameron-Moore, Megan Davies and Jonathan Oatis)

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