On December 15, 2014 9:54 am
By Rick Stouffer, Senior Energy Editor, Shale Energy Business Briefing
The train wreck that is crude oil prices is causing a serious negative impact to the high yield (i.e., junk) bond market, with some experts saying the junk bankrolling many of the energy industry’s producers faces potential losses in the $12 billion range.
It’s estimated the roughly $90 billion of debt issued over the last three years by below-investment-grade energy producers has fallen approximately 13% since the price of crude peaked in June.
“Because the energy sector is a large component of the US high yield market relative to some other asset classes, the market has received increased scrutiny due to recent declines in oil prices,” wrote Jennifer Ponce de Leon, Senior Portfolio Manager Head, High Yield and Mark Van Holland, Senior Portfolio Manager, Columbia Management, in a Dec 8 blog.
On Dec 2, energy accounted for more than 14% of the high yield market, down from 15.67% on Sept 1, but still nearly double the size of the No 2 sector, Health care at 8.5%, according to de Leon and Van Holland.
Energy is roughly 11% of the US investment grade market, according to the Barclays US Investment Grade Corporate Market.
Public Debt Markets Closed for Business
The oil selloff is causing consternation both inside and outside the oil patch. Insiders, including producers and, to a lesser extent, midstreamers and oilfield services firms, levered up over the last few years, as money was readily available at great rates and, when drilling $8 million, $9 million, $10 million wells, cash flow assistance is a way of life.
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