Banking & Finance

Energy, Mining Companies Lead Debt Default Rates Higher

Power Plant
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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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