The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt.
Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, Bloomberg reports investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to 8% next year.
“Anything that becomes a mania—it ends badly,” says Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”
The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were overlooked. A report from Moody’s Investors Service this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds recently were lower than what investment-grade companies were paying before the credit crisis.
Borrowing costs for energy companies have skyrocketed in the past six months even as West Texas Intermediate crude, the U.S. benchmark, has dropped 44% to $60.46 a barrel since reaching this year’s peak of $107.26 in June.
Yields on junk-rated energy bonds, meanwhile, have climbed to a more-than-five-year high of 9.5% this week from 5.7% in June, according to Bank of America Merrill Lynch index data. At least three energy-related borrowers have postponed financings this month as sentiment soured. Read the full story.
