How tighter lending could spell the end for ‘zombie’ commodities producers

For stressed commodity companies whose cost of production exceeds current pricing, the advent of a risk-off environment in the corporate debt markets could pose a serious challenge. This is particularly the case within the US high yield energy sector, which we saw was running into difficulties as it moved into the fourth quarter because of oil hedges rolling off, but more importantly because of revolving credit facilities being renegotiated at much tighter conditions.

This, we believe, is still an ongoing concern and will lead to a significant pick-up in defaults by small US energy companies that will now find it more difficult to get financing.

We would argue that for too long cheap money has led to an explosion of capacity, not just directly, but also by saving inefficient (zombie) businesses from default. In our view this could be about to change.

Paul Brain – Newton, a BNY Mellon company

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