The energy sector default rate is expected to rise above its long-term average of 1.9% in 2015, according to Fitch Ratings. Low oil prices have pressured cash flows and liquidity of smaller, less competitive exploration and production (E&P) companies.
Twenty-one energy and metals/mining companies were identified by a U.S. high yield bond price screen for significant risk of default by Fitch. Many of these flagged companies with deeply discounted bond prices are smaller, less diversified E&P companies or drilling service providers that operate in higher production cost regions, and others are coal-mining companies with secular challenges from reduced demand for both steam and metallurgical coal and legacy liabilities.
Fitch Ratings' bond price analysis of the energy and coal mining sectors found that market price pressure drove bids on a meaningful number of bonds below the typical market price distress threshold level of $0.80. To segment out the companies among this pool that Fitch considers to have significant default risk, we screened the high yield universe of North American-domiciled energy and metals and mining companies for bond issues with trading bids at a price of $0.55 or lower. The total amount of bonds trading at a price of $0.55 or lower is $20.1 billion as of April 17, 2015, or approximately 8% of the $260 billion of aggregate high yield debt outstanding in the two sectors from North American issuers.
Reconciling the currently adverse sector price dynamics with historical bankruptcy case studies, Fitch's report analyzes the drivers and outcomes of 28 energy and commodities sector bankruptcies and is the seventh installment of our in depth bankruptcy case study series. Fitch provides the bankruptcy filing drivers, reorganization enterprise valuations (or liquidation values), and creditor recoveries for secured and unsecured debt in these cases.
More than one-half of the cases in the group were filed in 2008 and 2009, which was a period of low commodity prices and adverse credit markets. Lender cuts to asset-based loan borrowing bases contributed to the bankruptcy filings of smaller E&P companies that relied on asset-based loan (ABL) facilities. In contrast to most other corporate sectors, it was relatively common for E&P companies to sell all assets as going concerns or liquidate in bankruptcy. The report also delves into the variability of state laws with respect to mineral rights, which can affect enterprise valuations and lender recoveries.