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S&P Says Oil, NatGas Sector 30% of U.S. Distressed Debt in December

The U.S. distressed debt ratio reached a peak for the year at 24.5% in December -- its highest since the 2009 recession -- and the oil and gas sector accounted for about 30% of the debt issuers, according to a report by Standard & Poor's Ratings Services (S&P).

"Drops in oil prices have impacted the profitability of oil and gas companies, whose spreads have widened considerably," the report said, which was led by Diane Vazza, managing director for global fixed income research. "Such spread expansion has had a spillover effect to the broader speculative-grade spectrum as a whole."

According to S&P, the last peak in the U.S. distressed debt ratio was 25.3% in August 2009, "when levels fluctuated from 14.6% to a staggering 70%." The ratings service added that the distress ratio, up from 20.1% in November (see Shale DailyNov. 30), has been at an elevated level since December 2014.

S&P counted 271 distressed issuers, with issues trading at higher than 1,000 basis points relative to U.S. Treasuries, in December, affecting total debt of about $233 billion. By comparison, the ratings service counted 228 issuers representing about $180 billion of debt in November.

The oil and gas sector topped the latest list of debt issues with 127, with about $75.3 billion of affected debt, and also led in terms of the distribution of distressed credits at 29.1%. Meanwhile, the metals, mining and steel sector reported the second-highest totals for debt issues (71), affected debt ($32.2 billion) and distribution of distressed credits (16.2%). S&P said the oil and gas sector also had the largest decrease in proportion of distressed issues, declining by about 2.2% month-over-month.

Metals, mining and steel led the field in terms of the overall debt-based distress ratio at 81.6%, while the oil and gas sector was second at 58%. S&P said the debt-based distress ratio for the former was 84.2% in December, and 59.1% for the latter.

Of the 271 companies on the distressed list for December, 102 have either negative rating outlooks or ratings on CreditWatch with negative implications, 162 have stable rating outlooks and three have developing outlooks, S&P noted. The ratings service said it rates half of the companies on the list as "B-" or lower.

In the oil and gas sector, S&P rated about 38.2% of new issues in the sector as "B-" or lower for the last three years. By comparison, about 40.5% of the sector's outstanding issuer credit ratings are "B-" or lower.

S&P listed 68 distressed credit issues in the oil and gas sector in December. Chesapeake Energy Corp. led the sector with eight issues and had the highest amount of outstanding debt at $7.43 billion, followed by Linn Energy LLC with $6.94 billion of debt. California Resources Corp., which spun off of Occidental Petroleum Corp., had the third-highest debt total at $5.0 billion, followed by Transocean Inc. at $4.25 billion.

The ratings service said a majority of the distressed issues listed in December have a weak chance of recovery, and higher losses were possible from defaults. Of the issues with recovery ratings available, 35% have S&P's weakest recovery rating of "6."

"Since the second half of 2012, we have seen a lot of refinancing activity as these issuers took advantage of low interest rates," S&P said. "However, as spreads begin to rise, we believe companies with distressed bond spreads are at a higher risk of default if they are unable to borrow or are only able to borrow on unfavorable terms. In addition, a high proportion (70%) of the debt that will mature during this period is either subordinated or unsecured, potentially reducing recovery prospects."

Credit ratings agencies have been busy tracking oil and gas companies throughout 2015, as the sector tries to weather continuing low commodity prices. The stress on the industry has also had an impact on U.S. debt markets (see Shale Daily July 31May 20March 30).

Complicating matters, Moody's Investors Service reported earlier in December that the Federal Reserve Bank's decision to raise interest rates will increase the borrowing costs and lead to greater credit risk for lower-rated companies, many of which are in the oil and gas sector (see Shale DailyDec. 18). However, in a separate report last week, Fitch Ratings reported "relatively light" cuts to reserve-based lending facilities of high-yield exploration and production companies by bank syndicates (see Shale DailyDec. 21).

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