Oil price weakness threatens energy default rate

According to Fitch Ratings, the recent downgrade of Petroleos de Venezuela S.A. (PDVSA) puts the ‘CCC’ and lower rated pool for energy at 22% compared to 18% for the overall high yield (HY) market and up from 13% one year earlier. The sector’s historical default rate was a benign 1.9% over the past 35 years and finished at 0.7% in 2014, but Fitch expects the energy default rate to rise in the next couple of years with crude oil prices at nearly six year lows that will likely remain depressed in the near to medium term.

Energy comprises 16% of the US$1.36 trillion HY universe and has risen 154% since the end of 2009. Energy new issuance registered US$51 billion, or 18% of total 2014 volume, marking the fifth straight year it has surpassed other sectors. More than US$78 billion of energy debt is rated ‘B-’ or lower.

The price distribution of energy bonds rated ‘B-‘ or lower changed dramatically since oil prices peaked in late July. Back then, just 1% traded at less than 80 cents and now 66% is below that figure.

The 2014 US HY default rate finished at 2.4%, well below the 35 year 4.1% historic average. Removing energy, the rate would be 2.7% in 2014 while the 35 year average rises to 4.4%.

Fitch projects that the default rate will end 2015 in the 1.5 – 2.0% range. Healthy non-energy company financial performance and minimal debt maturities over the next year contribute to a forecast in line with an historical 1.9% median rate over the past 35 years. Sustained oil price weakness is likely to be the main catalyst for potential increases to our 2015 default rate forecast, but there is some near term cushion due to the lack of energy debt maturities and credit enhancing activity over the past several years. Still, the oil price environment dampens Fitch’s HY default outlook for 2016 – 2017.

There were 37 issuer defaults tallying US$31.7 billion in 2014 versus 36 and US$18.5 billion one year earlier. Services/other accounted for six of the defaults, while broadcasting and media, gaming and lodging and restaurants, metals and mining, utilities, power and gas, and energy had four each.

Distressed debt exchanges (DDEs) have been executed frequently, accounting for the greatest share of defaults on an issuer basis in 2014, above bankruptcy filings and missed interest payments. LBI Media Inc., iPayment, Renhe Commercial Holdings, and Education Management Corp. were DDEs done in December.

The par weighted recovery rate ended 2014 at 64.2%, with a median of 60.2%.

Adapted from a press release by Emma McAleavey

Read the article online at: https://www.hydrocarbonengineering.com/refining/14012015/energy-default-rate-069/