Tumbling oil prices have triggered a selloff in energy-sector debt, sending signals that even companies with pristine credit ratings are facing greater risk of defaulting on their bonds.
About 44% of the investment-grade bonds of oil-and-gas companies are trading at speculative, or junk, levels as of Feb. 11, according to asset-management company Invesco Ltd. That’s about $199 billion of bonds overall.
Companies with investment-grade debt currently trading at junk levels include Hess Corp., Devon Energy Corp. and Williams Partners LP, according to data from MarketAxess.
The companies declined to comment.
The risk of a downgrade is particularly potent for companies with pressing financing needs, like bonds that are expiring and need to be renewed or capital-spending projects that require fundraising.
“Those companies would likely be in the bond market looking to issue new debt, and clearly that new debt is going to be priced at a much higher coupon than it would have been previously,” said Harry Mateer, global head of energy credit research with Barclays, referring to the monthly debt payment that firms make on their bonds.
A larger threat is faced by companies whose bonds are already marked speculative grade. If the $199 billion of investment-grade energy debt currently trading at junk prices is downgraded, the pool of high-yield energy-sector bonds would increase by 90%, said Rahim Shad, a senior high-yield analyst at Invesco.
This could push energy-sector bonds already trading at junk, to distressed level, as demand for that kind of risky debt has been limited, he said.
“It will certainly put short and medium-term stress on companies in the industry,” said Jeffery Elswick, who manages the $1.75 billion Frost Total Return Bond Fund.
Around 5% of the fund is invested in commodity-sector bonds, which includes a mix of investment-grade and speculative-grade energy debt.