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Thu Mar 26, 2020, 09:30 AM

94% Of Oil/Gas Sector Junk Debt Is Distressed (i.e. Paying 10% Over T-Bill Rate)

Nearly $72 billion worth of U.S. oil and gas speculative-grade debt is distressed, an amount that has doubled since the year began, and is now at an all-time high as oil prices have collapsed, signaling a coming wave of defaults by oil and gas borrowers, S&P Global Ratings said March 19.

The distress ratio – the proportion of speculative-grade bonds paying 1,000 basis points, or 10%, above U.S. Treasury bills, compared to the total number of speculative issues – soared to more than 94% for the oil and gas sector this year after Russia and OPEC failed to reign in crude oil production at the same time the COVID-19 virus emerged, cutting into worldwide demand, Ratings said.

The distress ratio indicates the level of risk the market has priced into bonds. A rising distress ratio reflects an increased need for capital and often precedes increased defaults when accompanied by a severe and sustained market disruption, the rating agency explained. The U.S. oil and gas distress ratio is higher now than its previous peaks during the 2016 oil price crash and the Great Recession of 2008, the credit rating agency noted.

S&P also noted that nearly 40% of the U.S. oil and gas companies with less than investment grade credit ratings were on CreditWatch with negative implications or a negative outlook, more than twice its normal average of 19%. It expects defaults to rise when these oil and gas firms find no way to refinance that debt in today’s market, skittish with worry about the coronavirus.



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