Oil Slump Heaps Losses on Energy Debt in $50 Billion Glut
By Nabila Ahmed and Matt Robinson Oct 15, 2014 12:32 PM ET
Gobbling up $50 billion of high-yielding U.S. junk-bond offerings by energy companies this year may have seemed like a good idea when oil was above $100 a barrel and yields were at record lows.
With prices falling toward $80, bond buyers have instead been saddled with more than $2 billion of lost market value and growing concern that too much credit has been extended too fast amid America’s shale boom. Prices on $1.6 billion of speculative-grade bonds sold by the upstart exploration firm of former Chesapeake Energy Corp. chief Aubrey McClendon have plunged as much as 19 percent since being issued in July. Another $1.1 billion issued the same month by Paragon Offshore Plc are down as much as 28 percent.
Because the borrowing capacity of oil and gas producers is directly tied to the value of their reserves, the falling commodity prices are increasing the risk that companies will face funding constraints should the selloff persist. Junk bonds issued by energy companies, which have made up a record 17 percent of the $294 billion of high-yield debt sold in the U.S. this year, have on average lost more than 4 percent of their market value since issuance, according to data compiled by Bloomberg.
“People are getting concerned about the ability to repay,” Ashish Shah, the New York-based global head of credit strategies at AllianceBernstein Holding LP, said in a telephone interview. “Bottom line: the cost of the thing they produce is declining and it’s declined very rapidly.”
Debt Pile
Speculative-grade bond deals from energy companies have made up at least 16 percent of total junk issuance in the U.S. the past two years as the firms piled on debt to fund exploration projects, Bloomberg data show. Typically the average since 2002 has been 11 percent.
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http://www.bloomberg.com/news/2014-10-15/energy-slump-means-1-6-billion-lost-before-first-coupon.html
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