As falling oil prices have taken their toll on high yield energy-sector bonds, the financial media, by extension, has singled out the whole high-yield market as one that investors should avoid. But the MacKay Shields High Yield Corporate team, led by Andrew Susser, believes the panic is overdone. One reason is that not all energy bonds are created equal: some are likely to be more resilient than others.
The selloff in energy has been severe and, as a result, the market is currently pricing in a prolonged period of low oil and gas prices. By the end of December, about one-third of exploration and production (E&P) high yield bonds trade at distressed levels (at spreads of more than 10% over Treasurys).
The media has focused on the size of the energy sector in the high-yield market: as a result of active issuance over the past few years, energy represents roughly 15% of the Credit Suisse High Yield Index. But the energy sector is comprised of several subsectors (see table below,) each with different sensitivity to energy prices.
For example, the fee-based cash flows of midstream and pipeline companies have a lower correlation to energy prices than E&P firms do.
Likewise, refiners can actually benefit from declining oil prices given lower input prices. “While the profitability of E&P companies is directly linked to oil and gas prices, there is vast dispersion in the strength of the credit profiles within the subsector.