Oil-Market Turbulence Whipsaws Junk Bonds

By Matt Wirz 

Volatility in oil prices is whipsawing the U.S. high-yield bond market.

Junk bonds of U.S. oil-and-natural gas companies were the most actively traded corporate securities Tuesday as they retraced much of their gains from Monday, when oil prices jumped 15% on concerns about disrupted Saudi Arabian production.

Energy companies account for about 6% of debt outstanding in the high-yield market, according to data from S&P Global Ratings.

Even if Saudi Arabia restores oil output faster than anticipated, high-yield investors are ambivalent about buying back into the energy sector because of their broader anxiety about potential deterioration in the economy and credit markets, analysts said.

"Monday's oil price spike should help somewhat, but the move is a double-edged sword given escalating recessionary concerns," Michael Anderson, a strategist at Citigroup Inc. wrote in a report.

California Resources Corp. and Chesapeake Energy Corp. were the top-traded high-yield bond issuers Tuesday as oil prices swung lower with about $265 million of debt changing hands, according to data from MarketAxess. California Resources' bond due 2022 dropped as much as 4.50 cents on the dollar to 58.50 cents on the dollar Tuesday before rebounding to around 60, while Chesapeake's bond due 2025 dropped as much as 3 cents to 84 cents on the dollar before rebounding to 86.

A string of bankruptcies in the oil patch triggered a steep junk bond selloff in late 2015 and many investors fear a permanent decline in oil prices could set off another round of defaults.

The oil and gas sector has the highest distress ratio -- defined as the proportion of bonds yielding more than 10 percentage points over U.S. Treasurys -- of any industry in the junk bond market, according to data from S&P. The overall junk bond distress ratio rose to 9.4% in August from about 6% in July, in large part because of a surge in energy-company bond yields. The distress ratio for oil and gas producers jumped to 36% from 18% in August, according to S&P.

The steep increase in borrowing costs for energy companies coincided with a sharp decline in new bond issuance from the industry to $5.5 billion through Aug. 16, the lowest level since 2006, according to S&P. Higher borrowing costs can become a critical problem for companies with below investment-grade credit ratings because most of them lack the cash to pay debt as it comes due.

U.S. government-bond yields fell, with the yield on the benchmark 10-year Treasury note recently trading at 1.807%, compared with 1.843% Monday. Yields fall as bond prices rise.

The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, fell to 91.17 Tuesday from 91.39.

Write to Matt Wirz at [e-mail]

(END) Dow Jones Newswires

September 17, 2019 15:34 ET (19:34 GMT)

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