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Some Bond Funds Bet on Longer-Lasting Rally in Energy Debt

Some Bond Funds Bet on Longer-Lasting Rally in Energy Debt

Saturday, 12 March 2016 12:21 PM


Many bond investors who benefited from the recent rally in battered energy debt prices are maintaining or seeking to add to their holdings, viewing the rally as the start of a longer-lasting uptrend rather than a blip.

Fund managers including MacKay Shields, Thornburg Investment Management and BlueBay Asset Management said they had increased their positions or initiated new ones in recent months after energy bond prices cheapened in 2015. Most of these fund managers had less exposure to energy debt at the end of last year than the indexes they compare their funds against.

They said energy debt remained attractive even after the latest rally. Many favored bonds of pipeline operators, saying excessive pessimism has sunk their prices to distressed levels.

"Bad things in energy are already priced in," said Andrew Susser, head of high yield at MacKay Shields in New York, which oversees $89 billion in assets. "Midstream bonds seem awfully cheap," he said. The midstream oil and gas industry sector includes companies that transport product via pipelines.

U.S. crude prices slid about 76 percent from June 20, 2014 to $26.05 a barrel by Feb. 11, 2016, nearly a 13-year low. Over the same period, the BofA Merrill Lynch U.S. High Yield Energy Index tumbled about 46 percent.

Since then, U.S. crude has risen about 44 percent, settling at $37.84 on Thursday. Over the same period, the high-yield energy index was up 20 percent.

Pipelines remain fundamental to the energy sector, which helps protect revenues of companies operating them, said Lon Erickson, portfolio manager of the roughly $4 billion Thornburg Limited Term Income Fund.

Erickson said the fund had some exposure to midstream company Williams Cos, while other funds held Kinder Morgan bonds.

He said oil producers began signaling steeper cuts in capital spending after oil prices slipped below $30 a barrel, which could cut output enough to eventually boost oil prices.

"The reality of this price environment is setting in and really causing people to take a look at their businesses," Erickson said. "It is a lot more interesting a place to be looking at today than it was even six months ago."

Lydia Chaumont, institutional portfolio manager for convertible bonds at BlueBay Asset Management in London, said she also believes more-balanced supply and demand could lift oil prices by year end. Chaumont said she was looking to add to positions in higher-quality energy companies.

These investors are optimistic despite lingering fears among ratings agencies. Moody's Investors Service downgraded 71 oil and gas companies between December and February and still has around 92 companies on review for downgrade globally.

DEFAULTS "NOT THE END OF THE WORLD"

Investors said energy assets could remain solid investments even if companies default on payments or file for bankruptcy.

Christian Busken, director of real assets at investment advisory firm Fund Evaluation Group in Cincinnati, said he was recommending clients invest in private equity funds that buy energy assets out of bankruptcy.

"All the things that are happening in the energy markets are setting the stage for higher prices down the road," Busken said, noting capex cuts. He said private equity funds buying assets of bankrupt energy companies stood to benefit once commodity prices recovered.

Midstream companies' credit quality could deteriorate as a result of lower volumes as exploration and production (E&P) companies produce less oil and gas, said Steve Wood, managing director of the Americas oil and gas team at Moody's in New York.

However, he said he saw less risk of midstream companies defaulting than E&P or oil services companies because their businesses are not as directly affected by low oil prices.

A default can halt a company from further degrading its value by paying junior creditors or continuing to make capital expenditures, Susser of MacKay Shields said.

"A default is not the end of the world," he said.


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Many bond investors who benefited from the recent rally in battered energy debt prices are maintaining or seeking to add to their holdings, viewing the rally as the start of a longer-lasting uptrend rather than a blip. Fund managers including MacKay Shields, Thornburg...
bond funds, invest, energy, debt
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2016-21-12
Saturday, 12 March 2016 12:21 PM
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