Energy Debt Fuels Potential for Increased Bankruptcies in 2016

With the recent rumor that Chesapeake Energy hired debt restructuring specialists Kirkland & Ellis, more and more investors are increasingly worried that bankruptcies for large and small oil and gas companies will accelerate in 2016. Notably, borrowing costs for U.S. junk-rated energy companies have soared to records, with yields on their bonds surging past 20%, exceeding the past peak of about 17% in 2008. Further, Moody's expects the U.S. default rate to reach the highest in 6 years in 2016 as a growing pool of investment-grade energy debt will most likely be downgraded to junk. According to Merrill Lynch, junk bonds globally have lost more than $360 billion of market value in less than a year, which has reduced investors' willingness to lend to other companies (even outside the energy sector). Notably, debt levels for Canadian Energy companies (E&P and oilfield services) still remain in relatively good shape on average, however if oil prices remain low through 2017, balance sheets will become a serious concern for both Canadian energy companies and investors alike.