Leveraged Loan Insight & Analysis – 8/15/2016

HY E&P Trailing 12-month default rate surpasses 31%

There was $5.2 billion of U.S. high yield bond default volume in July, pushing the trailing 12-month (TTM) rate to 5.1% from 4.9% at the end of June, according to Fitch Ratings. Halcon Resources Corp.’s long-awaited bankruptcy comprised nearly half of the July default total. The E&P company completed three distressed debt exchanges (DDE) in 2015 before filing on July 27. The market registered $39.9 billion of defaults over the past four months, with the energy sector comprising 67% of the total, led by Linn Energy LLC, SandRidge Energy Inc. and Energy XXI Ltd. Energy makes up $258 billion, or 17%, of the outstanding universe.

Meanwhile, TTM energy defaults were $45.5 billion and 60% of the $55.4 billion YTD overall total. The July energy TTM default rate reached 16% while the E&P subsector rate climbed to 31.2%. Bankruptcies compose the majority of the sector’s volume; however, there have been more DDEs done this year in number. Nearly half the names on Fitch’s Bonds of Concern table are from the energy sector, with several candidates likely defaulting before the end of the year. Fitch Ratings expects the energy default rate to reach 20% during the year before settling at 16%–18% by year end.