E&P Debt Recoveries Hit ‘Catastrophic’ Level, Moody’s Saysby
Creditors get 21% in bankruptcy claims, less than half norm
Distressed bond exchanges usually fail to avert Chapter 11
Creditors of energy exploration and production companies that went bankrupt last year recouped less than half the usual amount for their claims, and 2016 is shaping up just as bad, according to Moody’s Investors Service.
Recovery rates for 15 U.S. E&P bankruptcies averaged a “catastrophic” 21 percent last year, well below the historical average of 59 percent, Moody’s said in a report released Monday. Senior unsecured bondholders were hammered even more, averaging just 6 cents on the dollar. Collectively, the debacle could be worse than the telecom industry’s collapse in the early 2000s, measured by both the number of companies that go bust and the recoveries, Moody’s said.
Many of the E&P firms that went bankrupt in 2015 were smaller companies with less flexibility to maneuver as energy prices crumbled, while larger companies were able to stave off failure with debt exchanges and new second-lien issuance, analysts led by David Keisman wrote. But more than half of those swaps were followed by bankruptcy, according to the report.
“I don’t expect the recoveries for the companies that went bankrupt in the first half of 2016 to be any better,” Moody’s analyst Amol Joshi said in an interview. “The worst may be behind them, but the sector still remains quite stressed.”
Borrowing base revolvers, loans backed by oil and gas reserves, had the highest recovery rate among asset levels, recouping 81 percent. Despite outperforming other debt, that number fell “significantly” short of the historical average of 98 percent, according to Moody’s.
Companies that seek court protection in the second half may fare somewhat better amid more stable capital markets, better commodity prices and higher asset values, the report said.
Many of the larger E&P companies that pursued distressed exchanges may have made their situations more dire by increasing the amount of debt they faced, Moody’s said. Historically, distressed exchanges followed by bankruptcies have resulted in lower recoveries, according to the report.
“As these investors piled on new money into these companies which were stressed, it only added more debt to their balance sheets while their asset value wasn’t really increasing,” Joshi said. “It prolonged the pain.”
Many of the distressed exchanges that ended in bankruptcy didn’t reduce leverage as much as was needed to survive, said Spencer Cutter, a credit analyst who follows troubled energy companies at Bloomberg Intelligence. Those deals “were just too small to really move the needle,” Cutter said. “Particularly when exchanging unsecured debt for new secured debt, I think a lot of it was driven by investors trying to jockey for position.”
Bankruptcies in the sector thus far this year are already about twice 2015’s total, according to the report. Moody’s is monitoring 25 E&P companies that have sought court protection in 2016, Keisman said.