How 'Zombie' Oil Companies Stay Alive in Life-or-Death Debt Markets
(Bloomberg) -- Beneath the surge in corporate defaults lies a surge in distressed exchanges.
Such exchanges — defined by Moody's Investors Service as when a troubled company offers its lenders new or restructured debt, securities, cash, or other assets, that amount to a smaller commitment than the original IOU — could have big implications for debt markets as they stretch out the current credit cycle and result in even greater losses for investors.
The trend is most apparent in the energy sector where oil and gas companies have been deploying a raft of creative measures to stay afloat amid lower crude prices that have crimped profits and threatened their survival. Such measures have included swapping unsecured debt for secured, offering discounted buybacks of existing debt, or junior-lien debt that gets paid after other creditors.
"While these [distressed exchanges] do result in some level of loss to bondholders, unlike missed payments and bankruptcy filings the bonds typically remain eligible for inclusion in the high-yield index," Kai Gilkes and Anneli Lefranc, analysts at CreditSights Inc, wrote in new research. They note that the 12-month default rate rose to 7.2 percent for U.S. junk-rated bonds in August. That's an increase of 30 basis points compared to July's default rate of 6.9 percent, spurred on by six corporate defaults last months — including a trio of U.S. energy companies. "Distressed exchanges have contributed greatly to the rise in default rates," they add, with 38 of the 75 U.S. high-yield defaults over the last 12 months coming from such deals.
The degree to which distressed exchanges are propelling defaults higher is apparent in the below CreditSights chart, which shows the U.S. and European default rate excluding the swaps.
The question now will be whether such exchanges actually help companies improve their balance sheets and reduce their debt long enough to enjoy a recovery in oil prices or the market's appetite for energy-related assets. If they don't, then truly troubled companies will only have succeeded in putting off the inevitable and their lenders risk suffering greater losses further down the line.
It's a point made more salient by this week's news that recovery rates for investors in energy company bankruptcies already averaged a "catastrophic" 21 percent last year — or well below the historical average of 59 percent, according to Moody's data.
"When all the data is in, including 2016 bankruptcies, it may turn out that this oil and gas industry bust may be on par with, and possibly worse than the telecom industry collapse in the early 2000s, in terms of both number of recorded bankruptcies and very poor firm-wide recoveries for creditors," the rating agency's analysts, led by David Keisman, said in their report.
Moreover, the degree to which such exchanges actually help energy companies stave off bankruptcy is not entirely clear. More than half of the exchanges struck by energy companies last year failed to stop the firms from filing from bankruptcy protection in 2016, according to Moody's. In the meantime, the deals may add to pressures in the oil market by keeping 'zombie' drillers alive for longer than crude prices might suggest."The issuance of second-lien debt — and other secured debt variants such as third-lien debt or even 1.5-lien debt — led to significant leverage creep in the already highly levered capital structures, while funding capital expenditures and extending the financial viability of distressed companies," the analysts wrote. "It arguably sustained the U.S. oil and gas supply, while prices remained uneconomic for a significant swath of such oil and gas drilling."
To contact the author of this story: Tracy Alloway in Abu Dhabi at talloway@bloomberg.net To contact the editor responsible for this story: Lorcan Roche Kelly at lrochekelly@bloomberg.net
WHAT DO YOU THINK?
Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
- Gunvor CEO Sees Russian Refining Capacity Taking Hit from Drone Strikes
- These Factors Helped Brent Oil Price Break Above $85
- Sinopec Engineering Posts Higher Annual Petrochemicals Revenue
- Imperial Pipeline in Winnipeg Goes Offline for Three Months
- Gaz System to Acquire Gas Storage Poland
- Subsea7 Secures Contract to Service Woodside's Trion
- Adnoc Inks Supply Deal for Ruwais LNG Project with Germany's SEFE
- EIA Boosts USA Crude Oil Production Forecasts
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- EIA Drops 2024 Henry Hub Gas Price Forecast
- EIA and Standard Chartered Offer Up Latest Oil Price Predictions
- Red Sea Region Sees Another Watershed Incident
- Chevron Oil Project in Kazakhstan to Cost $48.5B
- OPEC Voices Encouragement after IEA Affirms Support for Oil Security
- Biden Govt Bares Strategy for Freight Charging, Hydrogen Fueling Infra
- Rystad Looks at the Buzz Around White Hydrogen
- Ukraine Hits Third Russian Refinery In Escalating Drone Strikes
- VIDEO: Missile Attack Kills Crew Transiting Gulf of Aden
- Norway Regulator Blasts Proposal to Halt New Oil and Gas Permits
- Chinese Mega Company Makes Major Oilfield Discovery
- What Is the Biggest Risk to Offshore Oil and Gas Personnel in 2024?
- Is Peak Oil Demand Close?
- Vessel Sinks in Red Sea After Missile Strike
- JP Morgan, Standard Chartered Reveal Latest Oil Price Forecasts
- Exxon Rights in Stabroek Do Not Apply to Hess Merger with Chevron: Hess
- Rystad Forecasts Net Production of Top Permian Producers in 2024
- Analysts Reveal Latest Oil Price Outlook Following OPEC+ Cut Extension