How much worse is 2016 than 2015?
Junk bonds, trading like stocks since February, have skyrocketed and yields have plunged. But that doesn’t mean the bloodletting is over.
The trailing 12-month US high-yield bond default rate jumped to 4.9% at the end of June, the highest since May 2010 as the Financial Crisis was winding down, Fitch Ratings reported today. The first-half total of $50.2 billion of defaults already exceeds the $48.3 billion for the entire year 2015.
Energy companies accounted for 56% of those defaults. The energy sector default rate shot up to 15%. Within it, the default rate of the Exploration & Production (E&P) sub-sector soared to 29%!
And the default party isn’t over: “Despite the run-up in prices since the February trough, there will be additional sector defaults, with Halcon Resources expected to file imminently,” Fitch reported.
Issuance of junk bonds in the first half has plunged 34% from a year ago, to $120.5 billion, according to the Securities Industry and Financial Markets Association (SIFMA), as junk-rated energy companies are having one heck of a time borrowing money and issuing bonds. The fact that investors – who’ve now been burned for nearly two years – are reluctant to extend new credit to teetering oil & gas companies precipitates their default and bankruptcy. Fitch:
“The combination of high energy and metals/mining default rates and lower year to date issuance has been a one-two punch for the high yield bond market this year,” said Eric Rosenthal, Senior Director of Leveraged Finance. “The question going forward is whether macro events will disrupt markets and restrain issuance for the remainder of the year.”
So oil prices have surged from their low earlier this year, though they bounced off the apparent ceiling of just over $50 a barrel. Natural gas prices too have surged. Yet, four more E&P companies with $1.5 billion in combined debt filed for bankruptcy in June, according to Haynes and Boone’s Oil Patch Bankruptcy Monitor:
- Warren Resources ($486 million in total debt, including $180 million unsecured)
- Tauren Exploration ($23 million in debt)
- Maxus Energy ($295 million in debt, all unsecured)
- Triangle USA Petroleum ($692 million in total debt, including $382 million unsecured).
This brought E&P bankruptcies tracked by Haynes and Boone in the US and Canada to 43 filings in the first half of 2016, involving $40 billion in debt – of which $30 billion is unsecured.
In these bankruptcies, unsecured creditors end up pecking at the crumbs that fall off the table, if that, and even secured creditors can take a big haircut depending on how much the value of their collateral – mostly oil and gas in the ground and yet to be recovered – has plummeted. In some fields, the current price is too low to drill new wells profitably to recover the oil and gas. In these cases, the collateral value can get painfully close to zero.
How much worse is 2016 than 2015? During the entire year 2015, 42 E&P companies filed for bankruptcy, with a total debt of $17.2 billion. So, over the first six months in 2016, the debt in E&P bankruptcies exceeds the total for the entire year 2015 by 155%!
Both 2015 and 2016 combined – a measure of the Great American Oil Bust to-date – generated 85 E&P bankruptcy filings involving $61.2 billion in debt, of which $44 billion is unsecured.
And the rest of 2016? Haynes and Boone put it this way in its E&P report: “Despite the modest recovery in energy prices, all indications suggest many more producer bankruptcy filings will occur during 2016.”
The bankruptcies of oilfield services companies are tracked separately. Through May, the last report available, there were 23 filings with $6.4 billion in debt. This brings the total from January 2015 through May 2016 to 72 bankruptcies among oilfield services companies, involving $11.7 billion in debt.
Between E&P and Oilfield Services companies, the Great American Oil Bust has now generated a combined 157 bankruptcies involving $73 billion in debt, much of it unsecured and by now mostly evaporated.
And yet, this still doesn’t include the many bankruptcies of businesses that work with and supply the oil patch, from companies that house oilfield workers to small manufacturing shops. They’re part of the thousands of US companies that have filed for bankruptcy this year, after loading up on debt over the years while the economy has refused to hit that promised “escape velocity.” Read… The Big Unravel: US Commercial Bankruptcies Skyrocket