Junk Bonds Seen Leading Comeback for Beaten Norway Oil Services

  • DNB says restructurings have been better than feared
  • DNB says not obvious to be negative on debt side anymore

The debt cleanup in Norway’s battered junk bond market is giving reason to hope.

Battered by a drop in spending by crude producers that forced drillers and supply companies to restructure, the market is now less risky after agreements that were more favorable to bondholders than expected, according to the head of markets at DNB ASA, Norway’s biggest bank.

Negotiations have in some cases led to better recovery rates for bondholders than estimated, Ottar Ertzeid said in an interview in Oslo on Wednesday. That’s leading DNB to reconsider its view of the oil service debt.

“Our view, which has been negative so far, is a bit more balanced now,” he said. “In some cases the outcome has definitely been better than feared. And from very low levels there’s been this positive upside.”

Drilling vessels and offshore supply ship companies have struggled with their balance sheets. Seadrill Ltd., the offshore driller with the biggest debt load, last month week reached an agreement with banks on a first step in its refinancing and on Thursday agreed to swap bonds for equity in a second deal. Seismic surveyor Polarcus Ltd. and shipowner Songa Offshore SE reached deals with bondholders this year, while companies such as accommodation rig operator Prosafe SE are still negotiating.

Norway’s oil-intensive junk bond market, the largest in Scandinavia, has come to a near standstill amid growing defaults triggered by the crude plunge. The market is now recovering after bond prices hit rock bottom. The DNB High Yield Total Return Hedged Index fell as much as 26 percent to a low in March before paring that loss to about 20 percent over the past three months.

While the worst may have passed for high-yield investors, shareholders still face a rough ride, Ertzeid said.

The industry will continue to struggle with a significant oversupply of rigs and offshore vessels, he said.

“While we have been negative toward the offshore supply vessel and rig sector for some time and still have that view on equity,” he said. “It’s not so obvious any more on the bond side,” he said.

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