Tags: oil | price | Deutsche Bank | Debt

Deutsche Bank: Sinking Oil May Push Energy Sector to Brink

Monday, 08 December 2014 01:49 PM

Junk-rated energy companies that feasted on the debt market to fuel their expansion may be nearing the “point of no return” as collapsing oil prices increase the prospect of default, according to Deutsche Bank AG.

A sustained slump in crude may trigger a significant rise in the default rate in the energy sector, credit strategists Oleg Melentyev and Daniel Sorid said Monday in a report. About a third of companies rated B or CCC may be unable to meet their obligations should oil prices drop another 15 percent to about $55 a barrel, according to the analysts. Oil tumbled to a new five-year low Monday.

The disruption in the energy industry may be seeping into the high-yield market with average borrowing costs for speculative-grade bonds climbing to a 14-month high, Bank of America Merrill Lynch index data show. The Federal Reserve’s “supportive policy” may buy some time to withstand a larger shock, the Deutsche Bank analysts said in the report.

“Either energy has to rebound noticeably, or it could pull broader market indexes lower,” Melentyev and Sorid wrote.

Defaults may may jump to as much as 3.5 percent next year after falling to 1.7 percent earlier this year, according to the report.

Crude-oil futures in New York dropped as much as $1.74 to $64.10 a barrel in electronic trading on the New York Mercantile Exchange. They slid 97 cents to $65.84 on Dec. 5, the lowest close since July 2009.

Investor Opportunity

The extra yield that investors demand to hold debt sold by energy companies instead of government bonds climbed to 846 basis points from 635 basis points a month ago, Bloomberg data show. A basis point is 0.01 percentage point.

Energy companies issued a large amount of debt in recent years that would require them to “grow into their business models,” which would be possible if oil price was about $30 more than where it trades now, according to a report from Citigroup Inc. dated Dec. 7.

Traders looking to cover their positions may have exacerbated the selloff in oil and speculative-grade energy bonds, the New York-based bank’s analysts led by Stephen Antczak wrote in the report. The “crowded” long positions may have resulted in a more dramatic fall and presents an opportunity for investors to add some exposure, they said in the report.

The market value of bonds in the Bloomberg high-yield energy bond index has slid to $198.75 billion from $217 billion a month ago. The gauge has 361 members with an average credit rating of B+, or four levels below investment grade.

Junk debt is rated below BBB- by Standard & Poor’s and Baa3 at Moody’s Investors Service.

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Junk-rated energy companies that feasted on the debt market to fuel their expansion may be nearing the "point of no return" as collapsing oil prices increase the prospect of default, according to Deutsche Bank.
oil, price, Deutsche Bank, Debt
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2014-49-08
Monday, 08 December 2014 01:49 PM
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