Exposure to the energy sector and the wilting credit quality of that group’s high-yield debt issuers has been a frequently discussed topic during oil’s current bear market. So has the impact of declining energy sector credit quality on junk bond exchange traded funds because some of the big-name high-yield bond ETFs feature notable energy sector allocations.
However, junk bond investors face growing risks as companies look to refinance debt with interest rates beginning to rise, reports Matt Turner for Business Insider.
“The key question is: will credit markets be able to absorb the refinancing needs of lower quality high yield and leveraged loan borrowers?” Matthew Mish and Stephen Caprio, strategists at UBS, asked in a note.
The UBS strategists argue that roughly 35% to 40% of outstanding U.S.high yield and leveraged loan debt, or roughly $1.05 trillion to $1.2 trillion in low quality speculative-grade debt outstanding “is at risk.”
Still, investors need to understand their junk bond ETFs’ energy risks and if the funds they own are really as vulnerable as some pundits make them out to be. The Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL) is a good example of this scenario. ANGL tracks so-called fallen angel, speculative-grade debt, or those bonds that were born with investment-grade ratings but were later downgraded to junk territory.
As a result, the ETF’s energy exposure has increased in recent months as more energy companies that sold investment-grade debt have seen those bonds downgraded. However, in the case of ANGL, that does not mean the ETF is loaded with heavily distressed or near default issues.
“Fran Rodilosso, senior investment officer for Market Vectors’ fixed income ETFs, says its energy mix is different than other junk bond funds. ANGL tends to own higher rated junk bond issues, such as from midstream master limited partnerships. It doesn’t own distressed exploration and production names, he says,” reports Amey Stone for Barron’s.
Fallen angel issuers tend to be larger and more established than many other junk bond issuers. Furthermore, since these fallen angels were formerly on the cusp of investment-grade status, this group of junk bonds typically has a higher average credit quality than many other speculative-grade debt-related funds.
Market Vectors Fallen Angel High Yield Bond ETF
