This will most likely go down as the year of the Great Energy Debt Crisis, a spiral that exacerbated an economic funk that roiled the world.
Companies are starting to go bankrupt. Banks are preparing for losses tied to oil and gas loans. And bond markets have all but closed to energy companies, especially the lowest-ranked ones.
Borrowing costs for U.S. junk-rated energy companies have soared to records, with yields on their bonds surging past 20 percent for the first time, exceeding the past peak of about 17 percent in 2008, Bank of America Merrill Lynch index data show. Moody's expects the U.S. default rate to reach the highest in six years in 2016, and a growing pool of investment-grade energy debt will most likely be downgraded to junk in the near future.
Chesapeake Energy is fast heading toward default, with Standard & Poor's calling its debt "unsustainable.'' Bonds of California Resources, Linn Energy, Energy XXI, Chesapeake and EP Energy have all lost more than 75 percent since the end of July.
Without a doubt, the relentless carnage in energy debt is spilling over into the broader market, especially as prices continue to plunge, with Goldman Sachs seeing the possibility of crude prices dropping below $20 a barrel after rising as high as $107 in 2014.
An estimated $75.7 billion in value has been eliminated from the pool of U.S. energy-related junk bonds since the end of June. Those losses are reverberating through mutual funds and hedge funds, which enabled an unprecedented borrowing spree by these companies just years earlier and are now suffering the consequences.
This has reduced investors' willingness to lend to other companies, even outside the energy sector, especially those with business plans that are less than rock solid. Adding to this reduced investor demand are sovereign wealth funds, especially those in oil-producing countries, which have been selling assets rapidly. Norway may rely on its $810 billion wealth fund more than projected in the wake of oil declines, for example.
So all of a sudden, everyone is worried about the creditworthiness of companies they had previously showered with cash during the central banks' easy-money jubilee. And the more concerned investors now become, the less power policy makers have to further stimulate the economy through bond markets.
That is not deterring central bankers, who have a newfound fatuation with negative interest rates. Policy makers seem to think they have much more room to reduce rates, with European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda saying there are "no limits'' to how far they can ease policy. But it doesn't appear as if that's pushing investors into riskier debt anymore, at least not predictably. Policy makers need to employ some new strategies to reignite corporate balance sheets, or else they need to stand back and prepare for carnage well beyond the energy sector.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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