Distressed US energy debt jumped by US$11b amid oil collapse

[NEW YORK] Distressed debt in the US energy sector has jumped to US$190 billion, up more than US$11 billion in less than a week, as oil prices tumbled below zero.

The collapse of oil makes investors nervous about whether energy companies will be able to repay their debt. Energy sector distressed debt - bonds that yield at least 10 percentage points over Treasuries and loans that trade for less than 80 cents on the dollar - totaled US$190 billion on Tuesday, according to data compiled by Bloomberg. That's up from US$179 billion on April 15.

Distressed debt surged to the highest since 2008 last month as markets sold off on coronavirus fears and the oil price halved. The amount outstanding fell by nearly 50 per cent after the Federal Reserve announced plans to buy investment grade and some high-yield debt, boosting credit markets. But after oil fell below zero, distressed debt in the energy sector could retest recent highs.

"If oil prices stay the way they are, all this energy debt that was distressed but has rallied enough to not be anymore could very easily sell off again," said Bloomberg Intelligence credit analyst Spencer Cutter. "It's a matter of how long the market is willing to stay in this crazy environment, waiting for demand to pick back up."

Oil giant Occidental Petroleum has more distressed debt than any other US company, with its US$21 billion tally nearly double that of the next highest on the list. Oil companies made up five of the top 10 issuers with the most distressed debt as of Tuesday.

President Donald Trump wants to make funds available to oil and gas companies, he wrote in a tweet Tuesday. But bailouts for individual companies likely won't solve the greater issue, Mr Cutter said.

"They may be able to come up with some plan that helps some of these companies avoid going bankrupt," he said. "But that's not going to fix their fundamental problem that the market is oversupplied."

BLOOMBERG