Oil and Junk Don’t Mix as Worst Bonds Sink as Much as 19%

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Hercules Offshore Inc.
Hercules Offshore Inc. semi-subermisible oil rigs and jackup shallow-water drilling units stand in the Gulf of Mexico off the coast of Cameron, Louisiana, U.S. The Houston-based drilling company sold $300 million of eight-year notes in March at 100 cents on the dollar. Photographer: Aaron M. Sprecher/Bloomberg

If you’re wondering why junk bonds keep selling off, consider this: Oil prices are tanking and energy companies now account for a record proportion of the below investment-grade market.

Debt of high-yield energy companies has tumbled 4.6 percent since August, leading the market down as the price of Brent crude futures plummeted to the lowest in about four years. Some securities have fared much worse, like the 19 percent plunge in oil and gas producer Samson Investment Co.’s bonds.

“It’s been a pretty sharp move,” said Matt Eagan, a fund manager at Loomis Sayles & Co. in Boston. “This is the first time in a long time where a sector has seen a big setback.”

Every time the U.S. junk-bond market has faltered since 2008, it’s been rescued by record monetary stimulus that’s fueled demand for the higher-yielding debt. Now, there’s renewed concern that the world’s biggest economy won’t be able to escape a global slowdown, which would damp demand for energy at a time when the U.S. is producing more supply than ever.

Junk-bond investors piled into oil debt in the past decade. Energy companies now account for 15 percent of U.S. high-yield bonds, up from 9.7 percent at the end of 2007, Bank of America Merrill Lynch index data show.

Debt Plummets

Performance has suffered along with demand for oil, which will grow this year at the slowest pace since 2009, the International Energy Agency said yesterday. Brent for November settlement fell $3.85 yesterday on the London-based ICE Futures Europe exchange to $85.04 a barrel, the lowest close since Nov. 23, 2010.

The overall high-yield market posted losses of 2.3 percent since the end of August. Meanwhile, the extra yield investors demand to own energy debt instead of the average U.S. junk bond is the most in at least a decade, according to Bank of America Merrill Lynch index data.

Investors are being punished more for purchasing recent oil and gas bond offerings. Take, for example, $580 million of bonds that Paragon Offshore Plc sold in July at 100 cents on the dollar. The 7.25 percent notes maturing in 2024 have since plunged to 77 cents.

Hercules Offshore Inc., the Houston-based drilling company, sold $300 million of eight-year notes in March at 100 cents on the dollar. They’re now trading at 59.8 cents.

Samson Investment, a Tulsa, Oklahoma-based oil and gas explorer and producer owned by investors including KKR & Co., sold $2.25 billion of bonds in July that have fallen to 78.5 cents on the dollar from as high as 103.5 cents in August. Its debt is the worst performing among the 50 biggest junk-rated energy issuers in the Bank of America Merrill Lynch index.

Oil and junk, for now at least, don’t mix.

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