Oil Rout Rocks Colombia's Worst Bonds in Toughest Year Since '07

  • Company bonds had third-biggest decline in emerging markets
  • Pacific E&P's bond rout ran up investor losses to 72%

In a rough year for corporate bonds from developing nations, the rout in Colombia stands out.

Buyers of Pacific Exploration & Production’s notes lost as much as 72 percent as the oil producer’s cash flow worsened, while the longest-dated notes from state-controlled Ecopetrol SA sank 18 percent. Avianca Holdings SA’s debt tumbled 30 percent as the Colombian peso’s depreciation pushed up the airline’s cost to pay its dollar-denominated debt.

The country’s overseas bonds had the third-worst returns in emerging markets in 2015, with only companies from Brazil and Mongolia faring worse, data compiled by JPMorgan Chase & Co. show. At the root of the selloff was oil, as the 29 percent tumble in prices this year clouded the outlook for energy producers at the same time that it spurred the peso’s biggest decline since at least 1992.

“We had the worst possible scenario for these types of companies with higher leverage, which made them susceptible to adverse market moves,” Cesar Sanchez, the vice president of fixed-income sales at broker Ultralat, said from Miami.

Avianca’s bonds have been hurt by investor sentiment on the airline industry amid the regional slowdown, the company said in a e-mailed reply to questions. “Debt issued by all the airlines in the region has been impacted by this situation and Avianca hasn’t been the exception,” the statement said. Ecopetrol and Pacific press officials didn’t reply to e-mailed requests for comment.

Bonds from Pacific, Colombia’s biggest independent oil producer, posted the worst losses in emerging markets among companies that aren’t missing payments this year as its credit rating was cut seven levels by Moody’s Investors Service. Disappointing drilling results, the upcoming loss of rights to its biggest oil field and the slump in energy prices spurred speculation the company would run out of cash. Hopes for a rescue were dashed after Alfa SAB, a Mexican conglomerate with an investment-grade rating, pulled its offer to buy the company amid shareholder opposition.

Pacific has failed so far to fulfill its own pledge to sell oil infrastructure assets this year and analysts are estimating its 2015 loss will be triple last year’s level. If the company doesn’t reach an accord with its lenders by Dec. 28, banks could decide to trigger a default. Its bonds now trade at less than 25 cents on the dollar.

The slump in oil prices also battered Ecopetrol, though with the state’s backing it faired significantly better than Pacific. Its bonds underperformed benchmark sovereign notes as it set a lower annual output target for the second straight year.

Yield gap for Ecopetrol’s bonds and similar-maturity sovereign notes has widened
Yield gap for Ecopetrol’s bonds and similar-maturity sovereign notes has widened

Colombia’s growing dependence on oil -- its biggest export -- prompted forecasts for its current account deficit to widen to the worst since at least 1980. That, in turn, helped send the peso tumbling, and a weaker peso drove up the costs for Avianca to service its overseas debt. Making things worse, revenue for the airline is forecast to drop 6 percent this year amid lower demand, according to analysts surveyed by Bloomberg.

“It was the perfect combination for a selloff,” Sanchez said.

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