HONG KONG: Energy bonds were hard hit in Asian trading on Monday, as global investors speculated the oil price slump could increase the risk of corporate defaults across the sector in 2020.
As Saudi Arabia’s decision to slash its official price reverberated across markets, Brent crude futures were down US$12.33, or 26%, at US$33.96 a barrel, after earlier dropping to US$31.02, their lowest since Feb 12,2016.
Brent futures are on track for their biggest daily decline since Jan 17,1991, when they fell at the start of the first Gulf War after months of anticipation.
While lower oil prices have traditionally been positive for the global economy, the current backdrop of weak growth, disruptions to supply chains caused by the coronavirus outbreak and financial volatility could mean greater stress for firms.
The widening spreads show investors anticipate cash-flow and refinancing challenges for companies with external debt maturing in the coming months.
In credit markets, the negative sentiment generated by the plummeting oil price compounded existing concerns led by the coronavirus and fears the US economy could enter a recession.
The iTraxx Asia investment-grade CDS index, which charts the cost of credit, widened 21 basis point yesterday.
The price of the iShares iBoxx High Yield Corporate Bond ETF fell 1.1% last Friday, at one point reaching the lowest since Jan. 29,2019.
Credit for individual US energy companies is also showing signs of stress. The cost of five-year credit default swaps for Chesapeake Energy Corp spiked to the highest since early 2016. The company’s 8% bond due June 2027 last traded at 22.5 cents on the dollar last Friday.
Energy bonds were most affected by the trading volatility in Asia as they were offloaded by investors wary of the implications the sector would face from the oil price slump.
In Asian trading, high-yield US energy one-year CDS blew out to 1781 points from 208 on Feb 27.
Kingsview Asset Management portfolio manager Paul Nolte said the energy bond sell off was driven by fears energy sector defaults would start to rise this year.
“The energy decline is piling on. So now what you have with much lower oil prices is a heightened possibility that you are going to see defaults in some of the energy sector bonds, and I think that’s what has got the equity markets concerned, that this can go on for a while as Opec tries to figure itself out, ” the Chicago-based fund manager said.
The reaction from OPEC+ - made up of OPEC countries plus Russia and other allied producers - is uncertain following Saudi Arabia’s decision to break ranks, lower its prices and flag that it will step up production in a potential free-for-all fight for market share.
There is US$18.2bil in corporate debt in oil and gas sector due to mature in the next three months, according to Reuters calculations, and most of these issuers are ratings watch negative or on review for possible downgrade.
A report by S&P, the ratings agency, published in February said US high yield energy and natural resources bonds had the highest risk of defaulting in 2020 prior to the Saudi-led oil price sell down.
It said the sector’s bond issuance in 2019 was worth US$8.8bil, which was down from US$23.1bil one year earlier and US$31.6bil in 2017.
“If this drop-off continues, the sector could face heightened stress in paying off upcoming principal payments, which we estimate total about US$5.5bil in 2020 and US$11.8bil in 2021, ” the S&P report said. — Reuters
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