When we first explained to the public here, [4] that the excessive leverage and currently squeezed cashflow of many US oil producers could "trigger a broader high-yield market default cycle," the world's smartest TV-anchors shrugged off lower oil prices as 'unequivocally good' for all. Now, as a 40% collapse in new well permits [5] and liquidations occurring at the well-head [6], the world outside of credit markets is starting to comprehend the seriousness of the crash of a sector that was responsible for 93% of jobs created in this 'recovery' [7].
[8]
The credit risk of HY energy corporates has more than doubled to a record 815bps (over risk-free-rates) crushing any hopes of cheap funding/rolling debt loads. Suddenly expectations of 1/3rd of energy firms restructuring is not so crazy...
The chart above suggests another problem for hopers... credit markets - the most sensitive to cashflows at this stage - are signalling either prices have considerably further to fall or will remain at these thinly-profitable-if-at-all prices for considerably longer...
* * *
There is a bigger problem though. As the following chart shows, there is clear 'selling' of high-yield bonds (and some hedging) which has crushed the most-liquid (HYG ETF) instrument for actual yield risk.
[9]
In other words, there is contagion and managers are rotating from protection to selling and reducing exposure.
Charts: Bloomberg
