Crude oil crash exposes energy firms that binged on debt

Bloomberg | Updated on March 10, 2020

File photo   -  REUTERS

From Indian tycoon Anil Agarwal’s metals and mining company to American shale explorers, the historic crash in oil prices has left energy companies that loaded up on debt vulnerable.

With a global recession looking increasingly likely, commodities firms whose finances were already crumbling due to the outbreak of the coronavirus are suddenly on even shakier ground. In the US, defaults by energy companies are likely to exceed the 2016 peak and the risk of so-called fallen angels – or companies that go from investment-grade to junk – has risen, according to Morgan Stanley.

As investors flee risk in credit markets, companies are faced with looming debt bills. Energy and power generation firms globally have about $88 billion of US currency bonds due this year, and the cost to roll over debt has risen, with financial markets seizing up.

Oil explorers that have been on buying sprees and invested money into capital expenditure are exposed. In Asia, Indonesian oil firm Medco Energi Internasional was betting that oil prices would rise above $100 a barrel in a decade or so and planning to triple its oil and gas output. The company’s 2026 bonds slumped 25 cents on Monday and are around a record low of 73 cents on the dollar on Tuesday.

“Oil and commodities have been the first-order casualty in US dollar Asia credit,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group, adding that such bonds are showing a high correlation to the sharp sell-off in U.S. credit.

Other major slumps this week in the Asian dollar bond market:

  • Vedanta Resources 2026 dollar bonds slid 25 points on Monday and are hovering around a record low of 60.25, according to Bloomberg-compiled prices. The metals and mining giant faces looming debt maturities and is expected to tap the bond market, according to Nomura last month.
  • Coal miner Adaro Indonesia’s dollar bonds due 2024 dropped 12.4 points on Monday to a record low at 83.8. They were at about 86 cents on Tuesday morning, the prices show.
Published on March 10, 2020

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