The impact of falling oil prices has extended beyond the debt of exploration and production companies to some of their biggest creditors - collateralized loan obligations.
Investors have been unloading loans and bonds issued by E&P companies amid concern that cheaper oil will hurt their returns. And ratings agencies in the past few weeks have dimmed their outlooks for various segments of exploration and production, oilfield services and drilling industries; they are calling for a strain on operating margins that might see result in revenue declines of 12% to 17% in E&P and offshore drilling.
Now the impact is being felt on CLOs, some of the biggest buyers of noninvestment grade loans. In a report published Friday, Bank of America Merrill Lynch said that price action in the energy sector has led mezzanine tranches of deals with high concentrations to trade a bit wider.
Among BAML’s “monitored credits” in the energy industry that are widely held by CLOs is Sampson Resources, with a total of $190 million held in 98 CLOs; and Quicksilver, with $22 million held by seven CLOs.
However, spreads overall remained unchanged last week compared with the previous week, in part because many participants were attending an industry conference. The volume of bids-wanted-in-competition totaled about $650 million for the week, according to BAML’s report.
Legacy deals, those printed before the financial crisis, made up close to 60% of line items and they continued to perform well as they rolled down the curve.
Meanwhile, most of the supply in the European CLO secondary market consisted of front pay tranches or mezzanine tranches close to becoming front pay. “After a few weeks of relatively high supply in this part of the capital structure, and some spread widening, spreads held firm this week, despite some large blocks appearing,” the report states.
There new U.S. deals priced during the week, including Allianz Global Investors’ $413 million West CLO 2014-2, Cutwater Asset Management’s $412 million 2014-2 as well as Credit Suisse Asset Management’s $686 million Madison Park Funding XV. Year-to-date, U.S. issuance now totals $118.7 billion. No new deals priced during the week in Europe, where year-to-date issuance stands at 13.8 billion.
