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Energy Sector Will Push U.S. High Yield Default Rate Near 2%

July 15, 2019, 08:45 AM
Filed Under: Energy

The energy sector will lead U.S. high yield default volume for the third consecutive month following Weatherford International Public Ltd's bankruptcy, according to the latest High Yield Default Insight report from Fitch Ratings.

The July trailing 12-month (TTM) energy default rate stands at 4.1%, versus 1.9% for the overall market. Energy accounts for 30%, or $5.4 billion, of the year to date (YTD) volume and 64% of the outstandings on Fitch's Top Bonds of Concern list.

"We expect to see more energy defaults in the near term and many are legacy E&P or oilfield services names that became distressed from the 2014-2016 oil price collapse and remain troubled even with prices at $60/bbl," said Eric Rosenthal, Senior Director of Leveraged Finance at Fitch Ratings.

Fitch anticipates the energy default rate to be 5% for YE 2019 and 4% for YE 2020, topping the projected 2% overall market rate for both years. Six issuers with total bond debt of $8.7 billion have market bids on the notes below 40 cents, including Sanchez Energy Corp., which has a July 15 interest payment due on its largest unsecured tranche.

Fitch's Top Bonds and Tier 2 Bonds of Concern combined total fell 4% from last month, to $67.6 billion. The decline reflects the removal of Weatherford and Stearns Holdings LLC following their bankruptcies along with distressed debt exchanges for Denbury Resources Inc. and Mood Media Corp. In addition, several companies were removed from the Tier 2 Bonds of Concern list due to M&A activity or improved liquidity.

YTD overall default volume of $17.7 billion is down 26% from last year. Nevertheless, the second half of 2018 produced just $5.1 billion of defaults, including less than $1 billion during the third quarter (the YE rate finished at 2.4%). Fitch expects the TTM default rate to surpass 2% by the end of September.

YTD high yield issuance is up 24% versus 2018 after registering $28 billion in June, the largest monthly total since September 2017. Healthcare/pharmaceuticals continues to lead activity at 10% and is up 51% over last year. Robust May and June issuance resulted in the universe increasing for the second consecutive month and reverting to its YE size ($1.18 trillion). YTD high yield mutual fund inflows total nearly $13 billion and YTD returns exceed 10%.

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