Fitch: US Investors Flag High-Yield Energy Concerns
05 May 2015 - 10:11PM
Business Wire
US credit investors are increasingly wary of risk in the
high-yield bond asset class, primarily related to energy companies,
according to the Fitch Ratings/Fixed Income Forum latest senior
investor survey. Approximately 61% of respondents believe HY
corporate bonds are modestly or strongly overvalued.
Expectations for fundamental credit conditions were much more
negative for the HY bond asset class than for other fixed-income
segments in our April survey. More than three-quarters (78%) of
respondents said they expect HY fundamental credit conditions to
deteriorate in the next 12 months - up from 61% in our September
survey and ahead of leveraged loans, where 68% predicted
deterioration.
Fitch believes sustained low oil prices will result in an
increase in defaults among weaker HY energy companies over the next
couple of years. However, other sectors such as consumer
discretionary will benefit and support the broader economy. Roughly
96% of respondents believe the impact of the oil price decline will
have a neutral or meaningfully positive effect on the broader US
economy and 92% believe it will have a neutral or meaningfully
positive effect on the global economy.
The energy sector is the main source of credit concern for HY
bonds. Energy accounts for almost one-fifth (18%) of outstanding HY
bonds and is the corporate sector expected by most investors to see
deteriorating fundamental credit conditions. It comprises a much
lower portion (only 5%) of the institutional leveraged loan
market.
Survey respondents also expect HY spreads to widen - half of
those polled (49%) expect this trend for speculative grade
corporates, well ahead of the second-worst sector, CDOs.
Fitch has previously flagged the rising risk in HY especially
within the energy segment. The energy default rate is rising,
reaching 0.9% at the end of March, as Quicksilver Resources and
Dune Energy filed for bankruptcy. This rate is set to rise further,
due to American Eagle Energy's and RAAM Global Energy's missed
interest payments, along with Venoco Inc.'s distressed debt
exchange, while potential defaults for Connacher Oil and Gas,
Samson Investment Co., and Sabine Oil and Gas LLC loom with ongoing
restructuring talks. The trailing twelve month exploration and
production subsector default rate stands at 1.7% while the overall
HY default mark finished March at 3.4%, unchanged for the second
consecutive month.
Energy issuers are also paying up for new debt, reflecting
pressures from weak commodity prices and investors' greater
sensitivity to rising risk in the sector. The 7.3% new issue par
weighted average coupon for the HY energy sector during the first
quarter surpassed the overall non-financial HY corporate level for
the first time since 2011. This level was well above the 6.2%
figure for new issues in first-quarter 2014 and nearly 160 bps
higher than its 2013 trough. 85% of energy companies in the market
in the first quarter paid a higher coupon compared with the average
on their existing bonds.
The Fitch Ratings/Fixed Income Forum investor survey closed on
10 April. It represents the views of 75 senior US investors. We
will publish the full results in the next couple of weeks.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch
Wire credit market commentary page. The original article, which may
include hyperlinks to companies and current ratings, can be
accessed at www.fitchratings.com. All opinions expressed are those
of Fitch Ratings.
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