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.