Moody's Just Put Over Half A Trillion Dollars In Energy Debt On Downgrade Review

Tyler Durden's picture

One week ago, in the aftermath of the dramatic downgrade to junk of Asian commodity giant Noble Group, we showed readers the list of potential "fallen angel" companies, those "investment "grade companies (such as Freeport McMoRan whose CDS trades at near-default levels) who are about to be badly junked, focusing on the 18 or so US energy companies that are about to lose their investment grade rating.

Perhaps inspired by this preview, earlier today Moody's took the global energy sector to the woodshed, placing 175 global oil, gas and mining companies and groups on review for a downgrade due to a prolonged rout in global commodities prices that it says could remain depressed indefinitely.

The wholesale credit rating warning came alongside Moody's cut to its oil price forecast deck. In 2016, it now expects the Brent and WTI to average $33 a barrel, a $10 drop for Brent and $7 for WTI.

Warning of possible downgrades for 120 energy companies, among which 69 public and private US corporations, the rating agency said there was a "substantial risk" of a slow recovery in oil that would compound the stress on oil and gas firms.

As first reported first by Reuters, the global review includes all major regions and ranges from the world's top international oil and gas companies such as Royal Dutch Shell and France's Total to 69 U.S. and 19 Canadian E&P and services firms. Notably absent, however, were the two top U.S. oil companies ExxonMobil and Chevron.

Moody's said it was likely to conclude the review by the end of the first quarter which could include multiple-notch downgrades for some companies, particularly in North America, in other words, one of the biggest event risks toward the end of Q1 is a familiar one: unexpected announcements by the rating agencies, which will force banks to override their instructions by the Dallas Fed and proceed to boost their loss reserves dramatically.

What Moody's admitted is something profound, and which not even the equity holders of many energy companies have realized, namely that "Even under a scenario with a modest recovery from current prices, producing companies and the drillers and service companies that support them will experience rising financial stress with much lower cash flows," it said. This means far less value going to equity as the companies lurch ever deeper into financial distress, unless of course oil does rebound back to $100, which paradoxically can only happen - if only briefly - after a massive default wave (which ultimately will lower the all in cost of production).

Worse, Moody's also said that it sees "a substantial risk that prices may recover much more slowly over the medium term than many companies expect, as well as a risk that prices might fall further."

But the most dire warning from the rating agency which is suddenly showing far more perceptiveness than is typical, is the admission that China, as a source of global debt-funded demand, is no more:

"Moody's believes that this downturn will mark an unprecedented shift for the mining industry. Whereas previous downturns have been cyclical, the effect of slowing growth in China indicates a fundamental change that will heighten credit risk for mining companies."

Moody's is of course right, which is why we expect it will downgrade "investment-grade" rated copper-trading giant Glencore, whose bonds reflect a CCC rating at best, momentarily.

Meanwhile, here are the 69 US, 19 Canadian and 13 European companies (the full list of all global companies can be found here) that just Moody's black list, a grand total of 101 companies which now face a downgrade threat on just about $540 billion in total debt.

We can only hope none of the soon to be downgraded companies have downgrade-activated collateral triggers, as suddenly what was until recently a terrible liquidity picture in the US energy space (as per the Schlumberger conference call) is about to get far worse.

Below we list the US, Canadian and European companies, alongside their total debt, that are currently evaluated for downgrade by Moody's.

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arbwhore's picture

Yep. Moody's is always the last one in.

JRobby's picture

Hold off finalizing the list. It is only 1:52, there is plenty of time for Moody's to receive a wire transfer.

Looney's picture

All rating agencies should switch to the new Ratings Model:

F+    Slightly Fucked up

F      Fucked

F-     Fucked beyond all repair (FUBAR)


Father Thyme's picture
Father Thyme (not verified) Looney Jan 22, 2016 2:23 PM

Nobody expects the financial inquisition!

JRobby's picture

financial lack of inquisition

OutaTime43's picture

From the looks of it, there aren't many of them that can afford the Western Union fee.   On another note..  downgrading these equipment suppliers and drillers just guarantees that the snap back in prices will be even worse.  Lower credit rating means less ability to respond to rapid production needs as CAPEX falls to meet demand in mid 2016.

chubbar's picture

Irrelevant. The banks won't enforce the debt/loan  language and the FED will backstop them. Too many derivatives riding on this and the banks would fail as well. Nothing will happen until 'they" decide it will happen.

OregonGrown's picture

Agreed.... Didnt the banks shift all derivatives trades onto the government balance sheet a few weeks back?  What in the hell are Moody's so worried about? 

Did they NOT LEARN from s&p regarding what happens when a rating agency "peddles fiction" and starts downgrading US paper?

JRobby's picture

"The banks won't enforce the debt/loan  language"

Um?!? There are fees attached to failing to perform within cerain ranges spelled out in the "debt/loan language" that they pay banker lawyers a fortune to create. They will collect the fees even if it means loaning out more money to the borrowers and putting the fees directly into their own banker accounts to collect them.

Tinky's picture

A half trillion, a half trillion there, pretty soon we're talking about...

knukles's picture

... a real banking write off and capital crisis

BlindMonkey's picture

annd it's gone.  


Move along, this line is reserved for people with money in this bank.

booboo's picture

I smell a Buffet in this wood pile

Dr. Engali's picture

Get to work madam chair person.   

Rainman's picture

Three big words come to mind : Energy.Related.Derivatives

knukles's picture

Oh my!  Double-double leveraged 30X bullish crude perpetual options on futures contracts ....
Probably all owned by State Pension Funds, no doubt.

Haole's picture

"Ooh, so exciting, isn't it?" - Blade

Winston Churchill's picture

Should be; More Energy Related Derivative Exposure. MERDE for short.

blown income's picture

I pass PHI twice a day...all those expensive cars and trucks in the parking lot..oh and the helicopters are shiny too ..looks like dealership lots.


need moar wax...

Tinky's picture

For the benefit of those who haven't yet fully come to grips with "trillions", here's a bit of perspective:

If you were to look backwards, one million seconds would bring you back 12 days; one billion seconds, 31 years; one trillion seconds? 30,000 B.C., give or take a decade or two

Jack Burton's picture

What evidence do we have that any Ratings Agency is anything but a bunch of liars and manipulators and a part of the scheme to skim as much wealth as possible off of the underlying real economy?

No much I reckon.

jcdenton's picture

Which only means .. They are telling us 1/2 the story?

Derivatives explained by one that witnessed their creation

So, if 1 T = 30,000 B.C.

then ..

What of 1 Q?

shantyman's picture

Interesant....Moody's is well aware of the Dfed's suggesstion and still puts the watch out....I wonder if this whole thing is going into hyperdrive with a soon to be annouced default? Strange....trends and intentions, still the most valued of forecasting...

Winston Churchill's picture

Don't give it out and the bondholders and other creditors might well sue.

Those lucky peeps now have the weekend to mull over the fact they just got GMed.Good and hard.

Trucker Glock's picture

In other news, Moody's now target of DoJ and Congressional investigations.  Film at eleven. 

Arnold's picture

It would diffuse some of the Hillary punkin' coming to an Attorney General near you.

starman's picture

Oh I get it so that's why oil is rallying! Duh silly me.

taketheredpill's picture




"unless of course oil does rebound back to $100, which paradoxically can only happen - if only briefly - after a massive default wave (which ultimately will lower the all in cost of production)"


OR....Saudi Arabia announces a 2% production cut.

geno-econ's picture

An awful lot of oil is floating in tankers worldwide at prices that will not justify profits for shipowners and speculators if the price of oil does not go up soon ( within 4-6 months ).  Dumping will then exacerbate the problem sending prices in a freefall.  Question is at what price will China be tempted to purchase all that floating oil including more US crude available for export ? No doubt Russia will continue to pump and dump to survive. and China will be looking at the Fed and Draghi to keep printing before commiting to ramp up production of consumer goods for export. It is now a vicious cycle based on permanent Keynesyian printing.  Thank you Greenspan, Bernanke and Yellen for turning the normal business cycle into continuous fiat dependance.  It is ironical that WWII was fought over oil and other resource denial while the next war may be over too much oil and resources.

Spungo's picture

I didn't see Suncor on the list. Nice :D

DIGrif's picture

Oil rebounded 9+% on Friday? Sorry but I am throwing a major BULLSHIT flag on that one. Manipulation is so apparent Stevie Wonder could see it a mile away.