Mon Dec 15th, 2014 at 01:51:18 AM EST
Will the Oil Collapse Kill Energy Junk Bonds? (Yves Smith on Illari's post from Automatic Earth)
(The PBS News Hour Friday, December 12, noted that US oil prices dropped below $60/bbl Friday, causing the lagest drop in US stock markets in three years.)
Some context, (via Ed Harrison):
front-paged by afew
By Raúl Ilargi Meijer, editor-in-chief of The Automatic Earth. Originally published at Automatic Earth
Oil producer Russia hikes rates to 10.5% as the ruble continues to plunge, while fellow producer Norway does the opposite, and cuts its rates, but also sees its currency plummet. As Greek stocks lose another 7.35% after Tuesday's 13% loss on rumors about what the left leaning Syriza party will or will not do if it wins upcoming elections, and virtually anonymous Dubai drops 7.42%. We all know the story of the chain and its weakest link, and beware, these really still ARE global markets.
Meanwhile someone somewhere saved WTO oil from falling through the big, BIG, $60 limit for most of the day Thursday, and then it went south anyway. And that brings to mind the warnings about what would, make that will, happen to high yield energy junk bonds. Of which there's a lot out there, but not much is being added anymore, that market has been largely shut to companies, especially in the shale patch. So how are they going to finance their fracking wagers? Hard to see.
And something tells me this Bloomberg piece is still lowballing the debt issue, though I commend them for making the link between shale and Fed `stimulus' policies, something all too rare in what passes for press in the US these days.
Fed Bubble Bursts in $550 Billion of Energy Debt
The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt. Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights predicts the default rate for energy junk bonds will double to 8% next year. "Anything that becomes a mania - it ends badly," said Tim Gramatovich, chief investment officer of Peritus Asset Management. "And this is a mania."
Oil Pressure Could Sock It To Stocks
Follow the links to see how bad it is getting. Schadenfreud on steroids? Well, at least it is not $5 trillion - yet. This seems very much like the housing bubble, but smaller and concentrated in the fossil fuel industry. Perhaps this is why Citi and others were so desperate to get the US taxpayers supporting their derivative trades as part of the current US budget bill.