Are rising energy spreads a portent of default doom?

On 22 January, ratings agency Moody added 175 energy and companies to its downgrade watch-list, citing the slowdown in China and a collapse in commodity prices.

Fears over credit risk in the energy sector is reflected in the sharp spike in option adjusted spreads in US high yield energy bonds since the third quarter of 2015.

We believe the relatively high and increasing energy spreads reflect the increasingly stressed cash position of US energy companies, particularly non-conventional and higher priced energy producers. Given the “lower for longer” view of crude oil prices, we believe this pressure on higher priced energy producers will continue for the foreseeable future. The difficult question is to what extent this increase in spreads and eventual defaults rates will contaminate other sectors of the US economy.

Jason Lejonvarn – Mellon Capital, A BNY Mellon company

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