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Why oil and gas firms were major borrowers of high-yield debt

Phalguni Soni

Must-know: This week high-yield bonds didn't follow stock returns (Part 2 of 7)

(Continued from Part 1)

Oil and gas firms were major high-yield debt borrowers

U.S. high-yield bond (HYG) market issuance dropped by ~24% to $5.13 billion in the week ending July 18, compared to $6.78 billion the previous week. However, the number of transactions was higher coming in at 14 compared to 11 in the week ending July 11.

Including last week’s figures, total issuance in 2014 now stands at $199 billion, over 356 issues. This is about 8% higher than the $184 billion reported over the comparative period in 2013. Issuers have continued to take advantage of the continued low yields environment in 2014, brought about by the Fed’s accommodative monetary policy (Data source: S&P Capital IQ/LCD).

Primary market conditions were robust at the start of the week ending July 18, as borrowers took advantage of the prevailing low yield environment. However, on Thursday the crash of the Malaysian airliner over war-torn Ukraine spooked market sentiment as yields increased and borrowers pulled out funds from high-yield bond funds. You’ll find a more detailed discussion on yields and other secondary market trends in Part 4 of this series.

Use of proceeds

Out of the 14 transactions in the primary market last week, proceeds from eight deals were earmarked for refinancing purposes. Five issuers borrowed to fund acquisitions, while there was one deal issued to provide financing for a leveraged buyout (or LBO).

Issuance by sector

The Oil & Gas sector (XOP) dominated issuance, accounting for eight out of the 14 deals, and ~$3.51 billion or ~67% of the total issuance volumes of $5.13 billion. All Oil & Gas sector offerings except one, were made for refinancing older debt. Refinancing issues included that of Triangle USA Petroleum Corp. (TPLM).

There were two deals in the technology space and one each in the materials, media, hotels and gaming, and business services sectors.

What are high-yield or junk bonds?

High-yield bonds (HYG) or junk bonds (JNK) are rated below investment-grade—BB+ and below—according to Standard & Poor’s ratings system. Credit ratings are an assessment made by ratings agencies like Standard & Poor’s and Moody’s that provide an opinion on the borrower’s ability to make timely payments of interest and principal. In general, higher ratings imply lower credit or default risk, while lower ratings imply the opposite. Due the higher risk entailed in high-yield debt, investors also require a higher return to compensate them for the risk.

In the next section we’ll discuss more details about the major deals last week including the week’s largest debt issue made by the American Energy (AEGG)-Permian Basin acquisition.


Continue to Part 3

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