Managers of collateralized loan obligations are reluctant to sell their troubled energy loans at a loss, and they’re becoming increasingly exposed to the sector as oil slumps to a six-year low.
Instead of declining since “turmoil hit the energy markets late last year,” CLO energy holdings have “crept up” in recent months, according to a Barclays Plc research note on Friday.
“The broad trend is surprising and suggests to us that shedding energy exposure at palatable prices has proven very difficult,” the bank’s credit strategists, led by Bradley Rogoff, wrote in the note.
High-yield loans and bonds are heading for their third straight month of losses for the first time since 2008 as U.S. crude prices drop. Prices for debt issued by oil and gas companies have fallen as investors grow concerned that they will be unable to meet their obligations.
“Managers are faced with a difficult trade-off in the face of CLO investors’ extreme sensitivity to energy collateral,” the strategists said. “While they can reduce exposure by shedding energy loans, they must then swallow the potential costs of steep losses and par erosion.”
CLOs are the biggest buyers of leveraged loans, a type of high-yield, high-risk debt that’s typically issued by speculative-grade companies. First-lien energy loans are trading near 80 cents on the dollar, while junior ranking second-lien loans are around 50, according to the Barclays report.
While CLO holdings in energy and metals and mining haven’t declined in recent months, ‘‘top-tier managers’’ consistently have less exposure to the sectors, according to the report.
Last month, tier 3 managers had about 7 percent of collateral in energy and metals and mining, compared with about 5 percent for tier 1 and tier 2 managers, Barclays strategists wrote. Tier 1 managers are those that have raised more than $4 billion of CLOs since 2010, according to Rogoff.
U.S. oil prices dropped Friday to $40.32 a barrel, the least since March 2009.