Search this website. You can use fund codes to locate specific funds

Weekly credit insight

Chart of the week: opportunities in the energy sector

Recent headlines have been dominated by news of record issuance of European credit. But lost behind the noise is the surge of primary-market activity in the energy sector.

Last year was a difficult one for the energy industry. Lower-rated issuers were still struggling to adjust to lower prices following the 2014-2016 commodity-price crash, which culminated in increased volatility and a pick-up in defaults in 2019. Spread levels reached two standard deviations below the index on a spread-ratio basis, and with a rise in dispersion – investors increasingly differentiating between issuers that can withstand volatility and those that can’t – sentiment turned sour.

Figure 1: The oil price ticks up

Source: Hermes Credit, ICE bond indices, Bloomberg, as at December 2019.

But the mood improved in the fourth quarter: the oil price rose and investors took a (cautious) position in energy, resulting in the sector recording strong performance. Chesapeake Energy’s senior-secured debt deal also bolstered sentiment, as investors came to realise that the struggling company was still able to deal with upcoming maturities.  

Unsurprisingly, the recent spike in the oil price and implied volatility in the options market prompted energy issuers to tap the market. As a result, the energy sector now accounts for nearly half of all high-yield supply in developed markets year-to-date – a total of almost $8bn.

More Insights

The geometry of net zero: an accounting conundrum waiting to happen
Emissions accounting is often inconsistent, inaccurate and imply that climate change can be reduced to a book-balancing process.
2020 TCFD report: our climate-related financial disclosures
This report details our approach to identifying and managing climate risks.
Your Questions Answered by Unconstrained Credit
A quarterly series featuring the top 10 questions that clients and prospective clients ask our investment teams.
Sustainable oceans in focus in EOS’s Q2 Public Engagement Report
EOS takes a deep dive into our oceans, examining threats from overfishing, pollution and global heating.
Dark matters in finance: why climate change is bending bank disclosure standards
Climate change is pushing the boundaries of financial risk disclosure into unknown territory.
Credit Pulse: market update – 16 July 2021
In our latest Credit Pulse, we look at bankruptcies and recovery rates, and present a case study on an energy fallen angel.