Fitch: Energy Bond Missed Payments Accelerate; DDEs Losing Appeal

Distressed debt exchanges (DDEs), a prominent lifeline used by struggling energy companies since last April, may no longer be a viable tool to stem the tide of low oil prices, according to Fitch Ratings. The past three energy defaults have involved missed payments while four more are slated for later this month or in April, including Chaparral Energy, Linn Energy and Energy XXI.

"We've reached a point in the current lower-for-longer environment where smaller-scope DDEs might not be sufficient anymore to buy time for the weaker energy companies," said Eric Rosenthal, Senior Director of Leveraged Finance.

Many exploration and production companies have failed to gain traction in the secondary market, despite the $10 jump in oil prices over the past few weeks. Currently, $71 billion of non-defaulted energy bonds are bid below 50 cents.

Energy bond default volume totals $6 billion YTD, with an additional $9 billion slated over the next month, versus $17.5 billion for all of 2015. Fitch anticipates roughly $40 billion of additional outstanding energy bond debt will default this year.

February saw nearly $33 billion of fallen angels in the energy sector, pushing the high yield market up to $282 billion. As a result, energy now comprises 19% of the high yield market, up from 17% in January.

High yield energy new issuance has been light over the past six months at just $6.2 billion, excluding certain DDEs. Lack of capital markets access of the past year has been a pain point for struggling energy companies, making it more difficult to stave off bankruptcies.

Fitch expects the trailing 12-month default rate to close March at roughly 3%. Defaults will continue this year, potentially reaching $70 billion in the energy and metals/mining sectors.

Overall, Fitch projects just under $90 billion in 2016 defaults, which would be the third highest on record behind the $110 billion and $119 billion tallied in 2002 and 2009, respectively.

The full report, "U.S. High Yield Default Insight: U.S. HY Default Rate Forecast Raised to 6%; Energy to 20%," is available at www.fitchratings.com

Additional information is available at 'www.fitchratings.com'.

Fitch U.S. High Yield Default Insight (U.S. HY Default Rate Forecast Raised to 6%; Energy to 20%)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878685

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160317005773/en/