Market Extra: Brace for credit shocks as heaps of U.S. oil-field service company debt comes, warns Moody’s
Concerns are mounting as North American oil-field services and drilling companies face a $32 billion wave of debt coming due this year through 2024, a worry even before oil prices collapsed to a nearly two-decade low and the coronavirus outbreak grew into a global pandemic.
Now the outlook seems particularly grim for weaker companies needing credit, as drilling work dries up and oil prices collapse to about $20 a barrel, amid rising COVID-19 infections and Saudi Arabia and Russian threats to flood global markets with more crude output.
“The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets,” wrote Sreedhar Kona, a Moody’s senior analyst, in a report Wednesday.
Kona pointed out that smaller regionally or service-focused oil-field services companies “face the brunt of the sector’s weakness, and therefore the greatest refinancing risk.”
While the sector’s biggest investment-grade firms, Schlumberger Ltd
Why is that a worry? Because cash has been fleeing riskier sectors as big industries and individual workers look for billions of dollars’ worth of aid from the U.S. government to help limit the spread, and economic fallout, of the coronavirus.
The sharp sellloff in stock indexes deepened Wednesday, sending the Dow Jones Industrial Average
tumbling below 20,000, leaving the blue-chip index down 30% on the year to date and erasing all of its gains since President Donald Trump’s inauguration in January 2017.
The energy-heavy $1.5 trillion U.S. junk-bond market, which often tracks the tone in equities, has seen heavy carnage too.
About a third of U.S. junk bonds were trading at distressed ratios earlier this week, indicating the market was expecting an 7.66% default rate over the next 12 months, up from Moody’s 4.4% forecast, according to Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors.
Breaking out only energy debt put expected defaults at 14.08%, or nearly double, he noted in a Tuesday research note.
Meanwhile, shares of the bellwether SPDR Bloomberg Barclays High Yield Bond ETF
“That exit of capital from the high-yield asset class, although aimed at reducing exposure to energy, produces collateral damage on bonds not directly affected by falling oil and natural gas prices,” Fridson wrote of heavy selling in related ETFs and mutual funds.
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