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Downgrades for energy borrowers to plateau in 2017

The worst may soon be over for corporate borrowers from the battered US energy industry, according to S&P Global, as a flurry of debt sales suggests investors are confident the Opec supply cut will help put a floor under the oil price.

While defaults of energy groups will continue into 2017, analysts with the credit rating agency say they are likely to level out next year and that stresses on the energy sector will “eventually subside”.

“Defaults are clearly a lagging indicator of the carnage in the industry,” said Diane Vazza, an analyst at S&P, adding that downgrades have slowed. “There are still more [defaults] to come before we see the plateau.”

Appetite for energy bonds has rebounded alongside the run up in oil prices, which have been catapulted to fresh highs for the year in December after the production cartel Opec last week agreed a cut in supply for the first time since 2008.

West Texas Intermediate, the US crude benchmark, has climbed more than 90 per cent since touching a low of $26.05 a barrel in February.

The strength of investors’ conviction about the direction of the oil price was underlined this week by Chesapeake Energy, the indebted US energy group and a pioneer of the shale industry, selling debt for the first time in two years. The success of the group’s $1bn bond sale, increased from $750m, also underlined the progress companies have had in attracting new investors as they sell assets and cut costs.

The five energy deals that were completed on Tuesday — including offerings from Mexico national oil group Pemex, Parsley Energy, Rowan Companies and Matador Resources — marked the most since seven energy companies tapped markets on the same day in December 1993. Together the sales have firmly pushed the sector’s debt issuance above 2015’s pace, which was the slowest year since 2010, according to Dealogic.

“The worst of it is probably over,” said Henry Peabody, a portfolio manager with Eaton Vance, referring to the oil rout earlier this year. “It is in Opec’s interest and it is in Saudi Arabia’s interest to be sure that not too much capital comes back into the market.”

The energy industry has proved one of the best bets in US corporate credit this year, despite the surge of defaults. Roughly 20 per cent of high-yield rated energy groups in the US have defaulted over the past 12 months, outpacing the 4.8 per cent pace by the broader speculative rated corporate sphere, according to Ms Vazza.

So-called junk-rated energy groups — riskier companies rated double-B plus or lower by one of the major credit agencies — have returned 35.6 per cent in 2016, outpacing the broader high-yield index, according to Bloomberg Barclays Indices.

S&P has 55 energy groups on its list of companies most likely to default. Fifty-seven natural resources and energy groups have already missed obligations, filed for bankruptcy or completed a distressed debt exchange and triggered a default this year.

Analysts with the rating agency caution that the oil price, which remains more than half of 2014 peak levels, is unlikely to experience a “noticeable increase” over the next year.

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