Tags: Oil Price | Energy | Bondholders | Moodys

Oil's Crash Means Energy Bondholders May Lose Rank, Moody's Says

Thursday, 08 Jan 2015 10:36 AM

Investors who bought more than $50 billion of bonds sold by U.S. energy companies are at risk of being pushed lower down the ranks of creditors as the firms prepare to issue more debt to preserve liquidity amid plunging oil prices, according to Moody’s Investors Service.

Junk-rated oil companies that funded exploration and production with debt are the most vulnerable to the price of oil, which has fallen by more than half since June, Moody’s analysts led by Alexander Dill wrote in a report.

They are expected to turn to second-lien financing as the value of their energy reserves declines, Moody’s said. Such debt ranks higher than unsecured bonds and its investors would sit above existing bondholders in the event of a default.

Speculative-grade energy producers have sold $90 billion of bonds in the past three years as companies have relied on debt financing to make up for cash shortfalls as they expanded.

With the U.S. Federal Reserve keeping interest rates at historic lows, investors searching for yield have piled into the debt, pushing energy bonds’ share of the speculative-grade market to 17 percent since 2008, according to an Oct. 14 report by Citigroup Inc.

“Investors have been willing to accept the yield so far but their day of reckoning will come,” Dill, Moody’s New York-based head of covenant research, said in a telephone interview.

Moody’s found that 87 percent, or $21.7 billion, of bonds issued by midstream oil and gas companies, and 86 percent, or $3.2 billion, of bonds issued by propane producers have structures that allow new lenders to trump existing bondholders. The figures are extrapolated from the Moody’s database which includes most of these bonds issued between 2011 and 2014, Dill said.

‘Poor Protection’

“These companies also have poor protection overall because they are master limited partnerships, which are required to distribute substantially all of their cash to their owners,” according to the report.

Investors who buy any new second-lien bonds issued by energy companies are expected to receive a higher yield, Dill said.

“The fact is that second-lien debt is going to cost more,” he said. Yields on junk-rated energy bonds averaged 9.63 percent Wednesday, the most since July 2010 and up from 5.68 percent in June.

High-yield, high-risk debt is rated less than Baa3 by Moody’s and under BBB-minus at Standard & Poor’s.

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Investors who bought more than $50 billion of bonds sold by U.S. energy companies are at risk of being pushed lower down the ranks of creditors as the firms prepare to issue more debt to preserve liquidity amid plunging oil prices, according to Moody's.
Oil Price, Energy, Bondholders, Moodys
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2015-36-08
Thursday, 08 Jan 2015 10:36 AM
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