A reopened debt market may slow the rising default rate in the energy and mining sector, according to Fitch Ratings.
Vulnerable shale producers have benefited from liquidity lifelines in the form of second-lien notes, secured lending, equity raisings and injections from energy-related funds since the start of the year, Fitch analysts led by William Warlick wrote in a Wednesday report. This comes as 16.5 percent of U.S. energy bonds weighted by value were trading below 80 cents on the dollar, versus 0.1 percent a year ago, dragged down tumbling commodities prices.
“At the end of the first quarter, things did open up and a number of names took advantage in terms of prolonging liquidity bridges,” Mark Sadeghian, lead energy analyst at Fitch Ratings, said in a phone interview from Chicago. “We’ll see how long the bridges last.”
The analysts expect the pace of defaults for energy companies to keep rising over the coming quarters, but not to exceed 7 percent. There were 13 energy company defaults in 2015 to June 30, according to Fitch.
“Defaults are going to be high in energy, they’re going to be well above historical levels,” Sadeghian said. “It’s just we don’t think the worst case is going to materialize.”
The Fitch issuer-weighted default rate for all North American high-yield debt was 3.5 percent in the second quarter, compared with 2.5 percent the year before and the financial-crisis peak of 15.3 percent.