Faltering Oil Rally Boosts Leveraged Loan Defaults, Fitch Says

  • Templar, Stallion likely to miss interest payments, Fitch says
  • The defaults would push energy default rate to nearly 18%

The default rate for leveraged loans in the energy sector could spike close to 18 percent if Templar Energy LLC and Stallion Oilfield Services Ltd. are unable to make interest payments on their debt, Fitch Ratings said.

The companies will likely be forced to default on the loans in August, according to Fitch, as weak oil and gas markets leave them short on cash. The July trailing 12-month energy leveraged loan default rate rose to nearly 14 percent from 11.3 percent in June, Fitch said. Officials at Templar, an oil and gas exploration company, and Stallion, which provides drilling support, didn’t immediately respond to requests for comment.

“The impact of commodity price pressures has been the largest driver of defaults in the leveraged loan market this year,” said Eric Rosenthal, senior director of leveraged finance at Fitch. Nine of the last 10 defaults occurred in the energy space, he said.

The leveraged loan default rate for the energy sector increased after companies including C&J Energy Services Ltd., Atlas Resource Partners LP and Atinum MidCon I LLC filed for bankruptcy this month. An oil-market rally earlier this year has faded in recent weeks, with prices falling to a three-month low on Tuesday, increasing speculation that more energy companies won’t be able to pay their bills.

Global Defaults

Global corporate defaults rose to 105 issuers so far this year, according to a report from S&P Global Ratings. More than 54 percent came from the energy and natural resources sector, according to Diane Vazza, S&P’s head of global fixed income research.

In a separate report, Fitch said bankruptcy filings this week by Halcon Resources Corp. and Atlas boosted the trailing 12-month default rate to 30.7 percent for high-yield bonds issued by exploration and production companies, and 16 percent for the energy sector.

Energy and metals and mining are expected to make up 62 percent of all leveraged loan defaults in August, Fitch said. It would be the 16th consecutive month that loan defaults would include a company from the energy or metals and mining sectors.

The overall leveraged loan market “remains resilient,” according to the report.