Default rate hits 3.7% as oil and gas sector breaks record

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The default rate for the S & P / Loan Syndications Trading Association leveraged loan index is around 4%, as large oil and gas companies California Resources Corp. and Seadrill Partners LLC collectively missed payments on nearly $ 5 billion in term loans this month, bringing default rates to an all-time high.

The default rate for leveraged loans by number of issuers is 3.88%, a high of almost 10 years. Going up, the rate is currently at a five-year high of 3.70%.

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As a result of these significant defaults, the oil and gas sector default rate reached an all-time high of 31%, surpassing the previous February 2018 record of 27%.

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On July 15, California oil producer California Resources filed for Chapter 11 protection in a Houston bankruptcy court after failing to pay interest on its term loans and senior notes. CEO Todd Stevens said the company has significantly reduced “the inordinate debt burden that we inherited from Occidental Petroleum Corp. during our split in December 2014,” which took place just as oil prices hit. were entering a historic and prolonged period of decline.

Following a series of liability management exercises, the company was ultimately forced to further reduce its debt burden through a Chapter 11 process given “today’s unprecedented market conditions, including oversupply and reduced demand due to COVID-19 ”. The company’s bankruptcy plan calls for the elimination of more than $ 5 billion of its $ 6 billion debt.

Seadrill Partners, meanwhile, was recently demoted by S&P Global Ratings to SD, or selective default, of CCC and a negative outlook, after the company missed a $ 49 million interest payment due on June 30 on its $ 2.6 billion B term loan maturing in February 2021. The rating on the company’s B term loan (L + 600, 1% floor after a 2018 amendment) has been downgraded to D, from CCC , due to non-payment, causing a default in the index.

The rating agency said it did not expect the interest payment to be made during the 30-day grace period expiring July 30, as the company said it was negotiating an agreement with the holders of the ‘bonds to capitalize interest in order to improve liquidity.

S&P Ratings notes that the oil drilling market has been “tested over the past few years” making Seadrill’s capital structure “untenable”. The agency added that the recent drop in oil prices and the pandemic “have dramatically exacerbated the problem,” saying it believes Seadrill is working to “preserve liquidity before a possible broader debt restructuring”.

Finally, with disproportionate defaults removed from the calculation and a partial decline in the weighted average supply of oil and gas loans since the March price drop, the sector-level distress ratio of performing loans – characterized by loans with the price is less than 80 – fell back. from its staggering 82% to 25% peak in March.

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Stepping back from the leveraged loan market, S&P Global Market Intelligence’s probability of default model for the oil and gas industry, which includes companies that trade on major North American exchanges, shows that 15 oil and gas companies with the highest likelihood of default scores, 13 have seen their scores increase significantly since the start of the year, and analysts agree that companies large and small are showing warning signs.

Again, Market Intelligence’s probability of default model examines a set of oil and gas companies separately from the S & P / LSTA Leveraged Loan Index. It is included in this analysis to give a broader view of the health of companies in the oil and gas sector.

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This S&P Global Market Intelligence news article may contain information on credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.

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