LONDON & NEW YORK--(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.