Struggling O&G co.s losing vital financial lifeline by missing distressed debt payments

Fitch projects $90 billion in 2016 defaults, 3rd highest on record behind 2002 ($110 billion) and 2009 ($119 billion)

Distressed debt exchanges (DDEs), a prominent lifeline used by struggling energy companies since last April, may no longer be a viable tool to stem the tide of low oil prices, according to Fitch Ratings.

The past three energy defaults have involved missed payments while four more are slated for later this month or in April, including Chaparral Energy, Linn Energy and Energy XXI.

“We’ve reached a point in the current lower-for-longer environment where smaller-scope DDEs might not be sufficient anymore to buy time for the weaker energy companies,” said Eric Rosenthal, senior director of leveraged finance.

Many exploration and production companies have failed to gain traction in the secondary market, despite the $10 jump in oil prices over the past few weeks. Currently, $71 billion of non-defaulted energy bonds are bid below 50 cents, Fitch said in a press release.

Fitch expects the trailing 12-month default rate to close March at roughly 3 per cent. Defaults will continue this year, potentially reaching $70 billion in the energy and metals/mining sectors.

Energy bond default volume totals $6 billion year to date, with an additional $9 billion slated over the next month, versus $17.5 billion for all of 2015. Fitch anticipates roughly $40 billion of additional outstanding energy bond debt will default this year.

Stock market volatility

February saw nearly $33 billion of fallen angels in the energy sector, pushing the high yield market up to $282 billion. As a result, energy now comprises 19 per cent of the high yield market, up from 17 per cent in Jan.

High yield energy new issuance has been light over the past six months at just $6.2 billion, excluding certain DDEs. Lack of capital markets access of the past year has been a pain point for struggling energy companies, making it more difficult to stave off bankruptcies.

Overall, Fitch projects just under $90 billion in 2016 defaults, which would be the third highest on record behind the $110 billion and $119 billion tallied in 2002 and 2009, respectively.