Fitch: E&P Bankruptcies propel US high-yield energy default rate

Fitch's high-yield energy sector default rate continued to climb with the recent Chapter 11 filings of two more exploration and production (E&P) companies, driving the trailing 12-month (TTM) rate more than one-half point higher to 2.6% and the E&P subsector rate to 5.1% from 3.7%, according to Fitch Ratings. The default rate includes issuers of high yield bonds in the US irrespective of the issuer domicile.

Significant decreases in oil and gas market prices have impaired many E&P companies' ability to pay interest and principal and led to some defaults. Most recently, both Sabine Oil & Gas Corp. and Lightstream Resources Ltd. incurred significant debt to fund drilling programs and their capital structures became unsustainable in the face of lower oil prices. Other significant E&P defaults this year include Midstates Petroleum Co., Connacher Oil & Gas Ltd., and Quicksilver Resources Inc.

The TTM energy default rate now exceeds its long term average 1.9%. Pro forma for the near term bankruptcy filing of Hercules Offshore Inc. expected by Fitch because the driller is currently soliciting votes for a prepackaged bankruptcy plant pushes the TTM energy default rate to 3.0%.

Sabine filed for Chapter 11 on July 15 with an aim toward reaching a balance sheet restructuring plan with creditors. Sabine had approximately $2.8 billion of credit facility and $1.15 billion of bond debt outstanding as per the 10-Q filing for the quarter ended March 31. The bonds are trading at under 20% of par value, indicating the market currently anticipates weak recovery rates. Sabine expects cash on hand and cash from operations will provide sufficient funding to sustain operations during the bankruptcy period with no debtor in possession facility needed. Cash balances were approximately $276.9 million as of May 8.

Lightstream defaulted via a distressed debt exchange on July 2. The company and certain holders of its unsecured debt agreed to exchange approximately $465 million of 8.625% unsecured notes due 2010 for $395 million of 9.875% second lien notes due June 15, 2019. Holders of the 8.625% notes that did not participate in the debt exchange became subordinated in the capital structure to the new second lien debt. Lightstream has high capital spending needs to maintain production.

Hercules reached a restructuring support agreement with a group of senior noteholders holding more than 67% of the senior note debt and is currently soliciting votes for a prepackaged plan of reorganization. A near-term bankruptcy filing seems highly probable.

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