Oil prices are climbing on expectations that coming sanctions on Iran will squeeze supply. Shown, an oil pump in the desert oil fields of Sakhir, Bahrain, in September 2015. Photo: Hasan Jamali/Associated Press
Debt from the energy companies that triggered a junk-bond rout three years ago is surging back on a rally in oil and natural gas prices.
The oil patch accounted for about 29% of all high-yield bonds sold so far this year, and energy sector debt has outperformed debt in other industries.
Case in point, Chesapeake Energy issued $1.25 billion of new bonds on Wednesday to refinance more expensive debt it had borrowed in 2016, and credit ratings firm Moody’s Investors Service said it would likely upgrade the company’s rating to single-B from triple-C. The new bonds were the most actively traded corporate bonds in the U.S. with $375 million changing hands, according to MarketAxess.
That is a far cry from the existential crisis Chesapeake weathered in late 2015 when stock and bond investors were betting the company would be forced to default.
Oil prices are climbing—Brent crude hit an almost four-year high of $82.55 this week—on expectations that coming sanctions on Iran will squeeze supply. Natural gas prices are also on the rise because of low inventory levels.
Those dynamics are likely to keep pushing energy-company bonds higher at least through the end of the year, said Jeffery Elswick, head of fixed income investments at Frost Investment Advisors. Energy companies account for about one-third of the high-yield bonds Frost owns in its flagship $2.9 billion bond fund, up from 10% normally. And energy bonds have risen about 3.25% this year, compared with the 2.5% average for all high-yield bonds, he said. Junk bonds make up about 12% of the fund’s total investments.
Companies in the energy and natural-resources industries are capitalizing on investor enthusiasm and have issued $42.5 billion of new high-yield bonds this year, according to data from Dealogic. That is only 2% more than they raised last year, but it compares with a 26% decline in overall junk bond sales over the same period, as rising interest rates—which push bond prices down—dampens new issuance in most U.S. corporate bonds.
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