Hedge Funds

Leon Black predicts 'a lot more' bankruptcies in energy

With oil prices expected to trade lower for longer, the number of energy companies unable to pay back loans and facing default has climbed dramatically, but the worst is yet to come, according to one CEO.

The chairman and CEO of $175 billion Apollo Global Management, Leon Black, told CNBC that default rates in energy firms could increase as supply concerns force oil prices increasing lower.

Leon Black, chairman and chief executive officer of Apollo Global Management
Patrick T. Fallon | Bloomberg | Getty Images

"When you look at the default rate side, defaults today are a little below 2 percent in general versus an average of over the last 10 years of more like 3 percent.," he said, speaking to investors at the SuperReturn conference in Berlin.

"But in energy for instance, you have defaults at 10 percent today and that is assuming oil at $45. With oil at $30, default rates are at 20 percent, so there are going to be a lot of bankruptcies in that area."

Oil prices have fallen as much as 70 percent since the downturn began in mid-2014 as soaring global production sees hundreds of thousands of barrels of crude produced every day, with not enough demand to sustain prices, hurting the profitability of energy firms.

Ratings agency Standard & Poors warned at the end of last year that some 50 percent of investment grade (junk) bonds for energy firms are "distressed," meaning they are at risk of default.

"If you look at CCC securities (junk bonds), in mid-2014 they averaged 8 percent, today they average 20 percent – that is a dramatic change," Black added.

“Bust of a Woman” by Pablo Picasso, 1931
Leon Black is mystery buyer of controversial Picasso sculpture

"So there are opportunities in equity selectively and increasingly there are opportunities on the credit side," he said.

Black was more positive on what he was seeing in Europe, despite the renewed concerns seen in the banking sector and he said Apollo had been "leaning in" to the region selectively for the last few years.

"I think quantitative easing (QE) seems to be working in many parts of Europe now, I don't think we are in dire straits," Black said.

"We have been leaning in (to Europe) on a selective basis. We have felt that especially the financial sector, banks, credit card companies, real estate companies represented very interesting opportunities over the last 5 years," he said.

"We have recently bought an insurance company in Portugal, one in Italy, a bank in Slovenia, a credit card company in Ireland and a glass manufacturer in France," he added.