Following yesterday's bankruptcy of Peabody Energy and today's Chapter 11 filing of XXI Energy, defaults among American junk bonds just topped $14 billion in April, the highest monthly volume in two years according to Fitch calculations, and that is only for the first two weeks.
April's surge in bankruptcy filings is not unexpected: according to JPM's default tracker, the number of bankruptcies was on a tear in both the month of March and the first quarter.
In the past month alone seven companies defaulted totaling $16.4bn, including $12.3bn in high-yield bonds and $4.1bn in leveraged loans. This marked the third highest monthly volume since the last default cycle, trailing only April 2014’s $39.5bn (TXU) and December 2014’s $18.3bn (CZR). With two weeks left in the month, April may well surpass March.
For context, during the last default cycle in 2008/2009, monthly default volume exceeded the March total only six times. By comparison, nine companies defaulted in February totaling $9.7bn (upwardly revised as UCI International totaling $400mn in bonds was added), which followed five defaults totaling $5.25bn in January and five defaults totaling a 2015-high $8.2bn in December. Default activity has clearly picked up over the last several months, with March marking the fifth consecutive month of greater than $5bn in default volume and the seventh $5bn month from the past ten. Further evidencing the recent pickup in activity, an average of $6.8bn has defaulted per month over the last eight months, compared with a $2.1bn average over the prior seven months and a modest $1.6bn monthly average from 2010 through 2014 (excluding TXU and CZR).
In the first quarter of 2016, already 21 companies have defaulted with debt totaling $31.4bn ($24.1bn in bonds and $7.2bn in loans), making 1Q16 the fifth highest quarterly default total on record. Notably, the four largest quarterly default volumes were $76.6bn in 1Q09, $55.0bn in 2Q09, $40.2bn in 2Q14 (with TXU), and $37.9bn in 4Q09.
For context, there were only eight defaults totaling $4.8bn in 1Q15. And as a reminder, 37 companies defaulted in 2015 with debt totaling $37.7bn ($23.6bn in bonds and $14.1bn in loans). In addition, while not incorporated into our main default statistics, distressed exchange activity continues to play an increased role in the default environment. Year to date, there have been five distressed actions totaling $1.1bn. For context, there were 25 distressed exchanges totaling $16.6bn in 2015, compared with only eight distressed exchanges totaling $3.0bn during all of 2014.
This is what a new default cycle looks like.
Going back to April, Fitch writes that this month’s default rate for coal companies is expected to come close to 70% while the oil and gas exploration and production sector is anticipated to reach 23% and metals and mining will climb to almost 20%.
Quoted by Bloomberg, Eric Rosenthal, Fitch’s senior director of leveraged finance, said that "the second quarter will not see a reprieve in defaults."
Which is a problem for both energy companies desperate to issue more debt, and for banks who remain on the hook for secured loans and uncommitted revolvers.
According to Fitch, despite a recent rally in oil, 57% of exploration and production companies with ratings of B- or lower are still struggling to sell their debt in the secondary market, with bids falling below 50 cents. The problem is unlikely to be alleviated while prices remain below break-even production costs. This means that for the sake of at least the existing equityholders of shale companies, the Doha meeting better not disappoint.
As for oil production, as we noted earlier, while company balance sheets may restructure, that does not mean that they will actually reduce oil production. Quite the contrary.