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

Credit: Industry Insights
Joe Howes, Credit Analyst, shares his fundamental views on telecoms, media and tower companies.
Samsung Electronics: driving the sustainability agenda in emerging markets
Our Global Equity team assess Samsung Electronics’ long-term prospects.
Fiorino: pandemic banking and its purpose
Banks have realised that their franchise value now hinges on supporting personal and business clients through the pandemic.
Global Equities case study: how Zoetis is advancing animal health
We seek companies with good or improving ESG characteristics.
Prosperity and preservation: the aim of active ownership
At the international business of Federated Hermes, we place both stewardship and high-active-share investing at the heart of what we do.
Quarterly Economic Outlook: we've never had it so loose
The US and UK are already running highly negative interest rates, when QE is considered, according to a report by the International business of Federated Hermes.