Fitch: Downgrades, Issuance Drive Record Amount of HY Energy Bonds

NEW YORK--()--The par amount of outstanding high yield (HY) energy bonds jumped $30 billion since the start of the year due to investment grade downgrades coupled with continued strong new issuance, according to Fitch Ratings. Energy bonds, with $247 billion outstanding, make up nearly double the next highest sector in the HY universe, almost $100 billion larger than banking and finance. At 17.5% of the market, energy represents the highest share since telecommunications produced a similar figure in June 2002.

Energy accounts for 14% of new issuance through the first two months of 2015, more than all other sectors and up from 9% during the first two months of 2014. Deals for Sabine Pass Liquefaction LLC, Citgo Holding Inc., and Targa Resources Partners LP propelled energy volume to twice the amount seen one-year earlier. In addition, 'BB' rated energy bonds outstanding climbed 27% since the end of 2014, as former investment grade companies are now in HY territory.

The energy landscape has changed considerably in the past two years. In 2013, 'B' rated issuers comprised 49% of total HY energy bonds outstanding but currently tally just 27% while the 'CCC' rated class expanded to 22% from 9% over that same period. At $53.8 billion, the current 'CCC' rated energy amount is greater than the next two largest industries (computers and electronics at $22.4 billion and services and miscellaneous at $21.9 billion).

The default rate for energy has been historically low, at 1.9% since 1980 and currently at 0.5% on a trailing 12-month basis, and there has been an approximate 20% correlation between the one-year lagged oil price and the default rate. While Fitch expects oil supply to begin to contract moderately in the second half of the year, leading to a gradual improvement in prices, there is considerable uncertainty around the timing, given changing shale economics. Fitch believes energy default rates will push above the historic average because the shale technology revolution has allowed the entry of many new highly levered single 'B' names.

Quicksilver Resources Inc. ($1.173 billion outstanding), American Eagle Energy Corp. ($175 million), and Saratoga Resources Inc. ($125.2 million) are recent examples of HY energy companies that missed bond payments. On March 3, Cal Dive International filed for bankruptcy, marking the first institutional leveraged loan energy default since Preferred Sands in December 2013.

The trailing 12-month HY bond default rate finished February at 3.4%, unchanged from the prior month. Through February, defaults totalled $16 billion, headlined by Caesars Entertainment Operating Co., compared to $0.5 billion one-year prior. There is an additional $1.9 billion of defaults occurring over the next month, led by Quicksilver. The HY universe stands at $1.41 trillion, up 10% since February 2014.

Fitch's "U.S. High Yield Default Insight" report will be published later this month.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--North American Energy Outlook - High Yield

Applicable Criteria and Related Research:

North American Energy Outlook -- High Yield

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Contacts

Fitch Ratings
Eric Rosenthal
Senior Director
Leveraged Finance
+1 212-908-0286
Fitch Ratings
33 Whitehall Street
New York, NY 10004
or
Mark C. Sadeghian, CFA
Senior Director
Corporates
+1 312-368-2090
70 West Madison Street
Chicago, IL
or
Michael Paladino, CFA
Senior Director
Leveraged Finance
+1 212-908-9113
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Eric Rosenthal
Senior Director
Leveraged Finance
+1 212-908-0286
Fitch Ratings
33 Whitehall Street
New York, NY 10004
or
Mark C. Sadeghian, CFA
Senior Director
Corporates
+1 312-368-2090
70 West Madison Street
Chicago, IL
or
Michael Paladino, CFA
Senior Director
Leveraged Finance
+1 212-908-9113
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com