Falling oil prices have taken a toll on price of energy-related stocks and credit instruments.
In the secondary loan market, credits such as Samson Investment, FTS International, Vantage Drilling, Fieldwood Energy, Ocean Rig, and Paragon Offshore have taken a beating, with losses accelerating appreciably this week in the wake of the “Black Friday” plunge in oil prices.
That said, the sector’s damage to the broader market has been limited when compared to high-yield and equities. The reason is that oil and gas-related issuers make up 4.5% of the S&P/LSTA Index, excluding utilities. That compares to 16% for the Bank of America Merrill Lynch High Yield Index and 8.5% for the S&P 500, according to S&PDJ Index analyst Howard Silverblatt.
For this reason, energy-related issuers’ drag on loan returns was far lighter than for high-yield and equities since Nov. 1, as these tables show:
Within the oil and gas segment, loan prices have fallen less precipitously than high-yield and stock prices. That is understandable, of course, given that loans are higher in the capital structure.
Despite this relatively better performance, loan managers are concerned that oil-and-gas could present an unexpected credit risk to a market where default rates (excluding Energy Future Holdings) are running below trend ($$). For reference, about 35% of oil and gas Index loans are covenant-lite.
Since Oct. 31, the share of oil and gas Index loans trading below 90 has jumped to 39%, from just under 1%. For the moment, however, just 0.95% of energy loans are trading at 80 or less – the sort of distressed level that suggests the market is worried about immediate default risk.
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