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S&P: Oil and Gas Raises Speculative-Grade Distress Ratio to 2009 Levels

With the oil and gas sector now accounting for 37% of total distressed debt, the U.S. distress ratio reached 20.1% in November, its highest level since September 2009, Standard & Poor’s Ratings Service (S&P) said in a report released Monday.

“The distress ratio was last higher in September 2009, at 23.5%, during the U.S. recession, when levels fluctuated from 14.6% to a staggering 70%,” said Diane Vazza, head of S&P’s Global Fixed Income Research Group. “The oil and gas sector accounted for 113 of the 361 issues in the distress ratio, because drops in oil prices affected profitability for oil and gas companies...and had a spillover effect to the broader speculative-grade spectrum.”

The 20.1% U.S. distress ratio in November represents an increase over the 19.1% distress ratio in October. The distress ratio “generally trended lower since the second half of 2012” but has been “elevated since December,” the firm said.

In November, S&P counted 228 distressed corporate issuers, affecting about $180 billion in debt, compared to 225 distressed issuers and $166 billion in affected debt in October.

The oil and gas sector distress ratio stood at 50.4% in November, far outpacing the overall 20.1% ratio. Metals, mining and steel had the highest distress ratio at 72.4%.

“As of November 16, the oil and gas sector had the largest proportion of distressed issues by count (113) and by distribution of distressed credits (31.3%),” S&P said. “By debt-based distress ratio, metals, mining and steel leads with 76.1%.”

In its report, S&P listed 63 distressed corporate issuers from the oil and gas sector. The firm noted that exploration and production (E&P) companies have been hit particularly hard by low oil prices.

“The variability in the distress ratio” along with other variables “indicates growing pressure for the default rate,” S&P said.

Throughout 2015, credit ratings agencies have been tracking an increase in stress on oil and gas companies resulting from low commodity prices, which has had a broader impact on U.S. debt markets (see Shale Daily July 31; May 20; March 30).

Moody’s Investors Service recently reported upward trends in both the U.S. speculative-grade default rate and the agency’s liquidity stress index (LSI), both driven in large part by increased strain on oil and gas companies (see Shale Daily Nov. 17; Nov. 3; Sept. 4).

In a recent report, Moody’s said the LSI for oil and gas companies reached 19.2% in October, compared to 3.8% in June 2014, when oil prices exceeded $100/bbl.

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