Refinery and pipeline junk debt outshines
Not all junk rated bonds in the US energy sector have come under fire during the rout in oil prices, with pipelines and refiners outperforming as investors rotate their holdings across the market.
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A pronounced fall in the price of oil towards a recent low of $64 a barrel – US crude traded for more than $100 in July – has put sharp pressure on sectors within the $186bn of energy-related junk rated debt. This has been notable among gas and oil producers, oil service companies and equipment providers, according to data from RBS Securities and The Yield Book.
In contrast, lower-rated debt issued by pipeline operators and oil refiners has generated a better total return than the broad junk market's gain of 3.5 per cent so far this year.
Overall, the energy sector has a total return of minus 1.3 per cent for the year and that has weighed down the broader $1.3tn US junk bond market.
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"The energy sector is dragging down the performance of high-yield, but companies that transport and refine oil are doing well," said Edward Marrinan, head of macro credit strategy at RBS Securities.
Within energy, the largest cohort, oil and gas producers, account for 54 per cent of outstanding bonds, and has registered a total return of minus 4.4 per cent this year. Oil servicers are off 7.1 per cent, while the debt of equipment makers has slid 9.1 per cent.
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Debt issued by pipelines, which accounts for 23 per cent of junk energy bonds, has gained 10.2 per cent this year. Refiners are up 5.5 per cent, but only comprise 3 per cent of low-rated energy paper.
Investors are closely following the trajectory of oil prices and whether the market's abrupt fall since the summer will halt. Nearly a third of US junk-rated bonds trading at a distressed level come from the energy sector, raising the prospect of looming debt restructurings for holders.
Jay Mueller, senior portfolio manager at Wells Capital Management, said "the past two months have been pretty ugly" for the energy sector. "I feel we haven't yet seen the bottom in the oil trade."
The broad junk bond market's lagging performance so far this year also signals that the appetite for credit risk may be about to change.
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Michael Kastner, managing principal at Halyard Asset Management, said a further fall in the oil price raises the prospect of more underperformance of junk-rated debt, to the detriment of the broader market.
"In fixed income, once you can no longer quantify risk versus return, you head for the exit," said Mr Kastner. With junk rated debt paying a coupon of 4-6 per cent, he said there was not enough protection against rising losses.