Some U.S. bond funds bet on high-yield survivors of oil carnage

Mon Oct 26, 2015 2:12pm EDT
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By Sam Forgione

NEW YORK (Reuters) - High-yield energy bonds are on track for their worst year since the global financial crisis yet some funds are holding on, convinced that markets underestimate the ability of many oil companies to ride out the crude price slump.

Some money managers such as Western Asset Management Co., Eaton Vance Corp. and Aberdeen Asset Management have broadly held on to their investments in bonds of oil and gas producers throughout the year even as now they lag more than 95 percent of their peers, according to Morningstar data.

Their exposure to energy is around 10 percent or more, with varying shares of that in high-yield energy debt.

The average yield on U.S. high-yield E&P credits has risen to 13.7 percent through Friday from 10.6 percent at the end of last year, according to Barclays PLC. That increase reflects fears that many companies will struggle with financing their operations and servicing their debt with oil stuck at around $45 a barrel, less than half of last year's highs.

The Barclays U.S. High Yield Energy Index is down 8.6 percent so far this year through Friday, putting it on track for its worst yearly loss since 2008.

As of Sept. 30, 8.5 percent of the $117 billion of outstanding high-yield debt issued by U.S. oil and gas firms was in default, either because they missed payments to bondholders, entered bankruptcy or conducted a distressed debt exchange according to Fitch Ratings, a record high since it began tracking the data in 2000.

With oil near its six-year lows, many investors expect those numbers to go up and avoid the sector altogether. Some, however, say the market is too pessimistic about oil prices and producers' resilience and maintain bets on selected energy bonds, even if it means being stuck in the red so far this year.   Continued...

People walk past the New York Stock Exchange in the Manhattan borough of New York, September 21, 2015.  REUTERS/Carlo Allegri