With oil prices slipping, the highly leveraged shale oil industry could experience greater defaults, potentially weighing on speculative-grade bond markets and junk-related exchange traded funds.
Year-to-date, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) dipped 0.5%, SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) fell 0.6%, PowerShares Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB) remained relatively unchanged and AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD) decreased 2.2%.
The junk bond ETFs are exposed to the potential problems in the energy sector. For instance, energy companies make up 12.8% of HYG’s portfolio holdings, 14.2% of PHB and 8% of HYLD.
Industry experts warn that more oil-and-gas companies are poised to follow the recent Samson Resources Corp. bankruptcy filing as oil prices remain low after the steep drop off that began last year, the Wall Street Journal reports.
Samson was among six energy companies to default in the past six weeks, according to Fitch Ratings.
West Texas Intermediate crude oil futures were hovering around $44.8 per barrel Friday, compared to about $93 per barrel the same time last year.
According to Fitch Ratings, the default rate among U.S. energy companies has accelerated to 4.8%, its highest level since 1999, up from 3.3% in August. Additionally, exploration and production companies are defaulting at an even higher rate of 8.5%, with default volume at its highest level in five years.
In contrast, the broader U.S. corporate default is still a relatively low 2.9%.
Meanwhile, U.S. junk-rated energy bonds show a yield of 11%, a little off its July 2009 high and almost double its 5.9% rate a year ago. The sudden uptick in yield reflect the lack of investment confidence that the bonds will be repaid in full – yields and bond prices have an inverse relationship, so the rising yield has corresponded with falling prices.
The broad junk bond ETFs are also trading at some elevated yields after the recent selling pressure. For instance, HYG has a 6.66% 30-day SEC yield, JNK has a 6.62% 30-day SEC yield, PHB has a 4.95% 30-day SEC yield and HYLD has a 11.06% 30-day SEC yield.
Many below-investment-grade oil companies have been able to stay afloat during the oil price falloff as investors continued to provide funding. However, lenders are beginning to shy away from the energy sector. U.S. banking regulators also recently told banks that a large number of loans to energy producers are substandard, a move that could force lenders to turn down further loans to energy players.
Andrew Calder, a partner in Kirkland & Ellis LLP, said that producers are left with fewer options available as the downturn persists.
“It’s a lot easier to get management teams to meet with your restructuring partners or financial advisers,” Calder told the WSJ.
For more information on the speculative-grade debt market, visit our junk bonds category.
Max Chen contributed to this article.