Junk Energy Companies Feel More Pain as Borrowing Costs Top 20%

  • `Well deserved' negativity amid asset-crossing economic slump
  • Oil at $30? Goldman Sachs sees below $20, Pimco forecasts $50

The cost for U.S. junk-rated energy companies to borrow in the bond market exceeded 20 percent for the first time ever after Goldman Sachs Group Inc. said oil may drop below $20 a barrel.

The difference between the price of holding high-yield debt sold by energy companies and ultra-safe Treasuries widened to record levels, according to Bank of America Merrill Lynch indexes. The move was part of a global rout that has seen stocks tumble toward a bear market and volatility rise amid fears of a worldwide economic slowdown. Crude could drop “into the teens,” from about $30 on Tuesday, before supply and demand are brought back into balance, according to Goldman Sachs.

“The negativity surrounding high-yield energy companies is, for the most part, well deserved,” said Christian Hoffmann, a Santa Fe, New Mexico-based money manager at Thornburg Investment Management Inc., which manages $65 billion. “Without a substantial improvement in the price of oil, we will see both more restructurings and losses for credit and equity investors in E&P companies.”

Diminished Cushion

In the U.S., the risk premium on the Markit CDX North America High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, jumped as much as 17 basis points Tuesday to 589 basis points, the highest since at least August 2012, before falling back to little changed by the end of the day. The energy sector added the most risk, climbing as much as 47 basis points to 1,534 basis points. A similar measure for investment-grade debt also touched an almost four-year high.

The number of issuers of U.S. dollar bonds trading at distressed levels has risen to the highest level since the financial crisis.

Crude futures fell 4.5 percent to $28.35 a barrel at 4:26 p.m. in New York, and are now down 23 percent this year.

“For a lot of oil companies in this environment, any fluctuation in price is going to be felt in the bonds because the equity cushion has diminished substantially,” said John McClain, a money manager at Diamond Hill Investment Group. “There is a lot of investor fear in the commodities space of who’s next, what’s the next shoe to drop.”

Consumer ‘Windfall’

While oil’s sustained slump has pounded the energy industry, the price is due to rise, according to Mark Kiesel, the chief investment officer for global credit at Pacific Investment Management Co. He said crude should increase to $50 by the end of the year as the economy continues to grow, powered by the consumer.

“The beneficiaries of low oil prices are going to be the consumer,” Kiesel said during a Tuesday interview on Bloomberg Television, calling lower oil a “$120 billion windfall” for Americans. “This is not an economy headed into recession. It’s an economy doing decently.”

Oil will end the year at $48 per barrel, according to the median forecast in a Bloomberg survey of economists and strategists.

Before it's here, it's on the Bloomberg Terminal.