Energy, Mining Companies Lead Debt Default Rates Higher
According to Fitch Ratings, the energy industry's default rate in August could more than double its historical average.
The impact of low commodity prices has taken a steep toll on energy producers, particularly in the oil and coal businesses. According to Fitch Ratings, the energy industry’s default rate could reach 4% in August, more than double its historical 1.9% average, and the overall corporate default rate could reach 3%.
Coal miner Alpha Natural Resources completed a distressed debt exchange in the first quarter of this year, but it filed for bankruptcy protection just four months later. Such an exchange indicates a subsequent default within one year in nearly two-thirds of cases, according to Fitch.
Arch Coal Inc. (NYSE: ACI) has already announced a distressed debt exchange offer that expires Friday, and at last look, it was getting a lot of pushback from existing lenders who argue that the swap dilutes their claims on the company’s assets. That Arch’s share price was up about 8% could indicate that the company has or is expected to prevail.
At the end of July, the overall corporate default rate for the trailing 12 months stood at 2.5%, up from 2.3% at the end of June. The trailing rate for energy companies stood at 2.5%, with the rate for exploration and production companies at 5%, and metals and mining companies’ rate at 7.1%.
Excluding energy and mining sectors, the corporate default rate for July was 2.3%, and if the bankruptcy filing of Caesars Entertainment Operating Co. is also excluded the overall corporate rate was a “benign 1.1%,” according to Fitch.
In addition to Arch Coal, oil producer SandRidge Energy Inc. (NYSE: SD) Friday announced privately negotiated purchase and exchange agreements under which the company will repurchase $250 million in senior unsecured notes for $94.5 million in cash and exchange $275 million of notes into new convertible notes. Using Fitch’s calculation, within a year the odds are nearly two in three that SandRidge will default.
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Paul Ausick has been writing for 247Wallst.com for more than a decade. He has written extensively on investing in the energy, defense, and technology sectors. In a previous life, he wrote technical documentation and managed a marketing communications group in Silicon Valley.
He has a bachelor's degree in English from the University of Chicago and now lives in Montana, where he fishes for trout in the summer and stays inside during the winter.
