It would appear that US domestic energy companies are issuing massive amounts of debt. However, unlike in previous years where oil was above $80 per barrel (until 2014) and proceeds from debt were used to expand production and fund ambitious growth strategies, companies are instead refinancing debt.
High yield US energy debt issued during September totalled $7bn which is about 31% of all high yield debt issued in the US during the month. In the energy sector, $15.2bn worth of investment grade debt was issued via 19 deals. High yield energy issuance has been swallowed up by yield-starved investors with even the lowest of rated junk bonds welcomed. This has caused junk rated bonds to tighten to three- year lows in terms of spreads over US Treasury bonds.
However, according to Standard and Poor’s, US oil and gas companies face $71bn of maturing bonds in 2019. Thus the issuance looks to continue whilst oil remains around $50 a barrel and the sector takes advantage of the current excess liquidity available to fund even the more risky of issuers. We remain very cautious of high yield, particularly in the US energy sector which has historically been a sector content to live with negative cash flows in the name of growth. Unfortunately, this looks to us like a bubble which continues to inflate, but is very likely to result in a rather large BANG.
September economic data is going to be very difficult to forecast, and even once released, explained; as there are various ideas on how the hurricanes and storms which wreaked havoc during the month is going to affect the economic indicators. Today we had September’s non-farm payrolls which fell by 33,000 with the two month payroll revision at -38k and the unemployment rate down 0.2% to 4.2%. The inflation indicators, average hourly earnings were up 0.5% on the month which is 2.9% yoy and the average weekly hours was at 34.4.
As mentioned above expectations were in a broad range and next month we could see massive revisions so the market impact was limited with the 10-year Treasury moving lower by just 5/32nds at the time of writing ahead of the US long weekend. Happy Columbus Day for Monday, too all.