Oil Bonds in China Signal More Credit Downgrades as Losses Mount
The debt of oil companies in China is trading at levels that indicate more pain for investors amid the most volatile crude prices in more than three years.
Anton Oilfield Services Group Ltd.’s $250 million of 2018 notes have tumbled almost 30 cents since Dec. 31 to 55 cents on the dollar, Bloomberg-compiled prices show. Chengdu-based Honghua Group Ltd.’s $200 million of 2019 securities, sold at par, or 100 cents on the dollar, in September, dropped almost 15 cents to 43.2 cents. MIE Holdings Corp.’s $500 million of 2019 debentures are down 19 cents to 57.4 cents.
Oil has fallen more than 56 percent from last year’s peak of $107.73 a barrel as the U.S. pumped crude at the fastest rate in more than three decades and the Organization of Petroleum Exporting Countries resisted calls to reduce supply. Standard & Poor’s downgraded MIE Holdings, which has fields in China’s Songliao Basin, earlier this week citing a weakening of its financial risk profile. Moody’s Investors Service cut Anton Oilfield to Ba3 from Ba2 yesterday and has kept Honghua’s rating on negative outlook since November.
“If you look at where these companies’ bonds are trading now, the market is pricing in even more rating cuts,” said Alan Kao, a Hong Kong-based credit strategist at Haitong International Securities Co. “Oil companies will continue to exist in the next five years, but they need to operate in a different capital structure given the level of oil prices. This implies carrying lower debt and interest expenses.”
The credit downgrades come as oil service providers start to issue profit warnings. Anton Oilfield said on Jan. 18 that earnings for the year ended Dec. 31 will be down by 140 percent while revenue is expected to drop about 20 percent year-on-year. Honghua said on Nov. 19 it expects full-year net income to fall significantly. The company may be next in line for a ratings cut, according to Sandra Chow, a Singapore-based analyst at independent research firm CreditSights Inc.
The CBOE Crude Oil Volatility Index reached 60.16 on Jan. 20, the highest level since October 2011. Crude stockpiles in the U.S., the world’s biggest oil consumer, probably expanded by 2.4 million barrels last week, a Bloomberg News survey showed before data from the Energy Information Administration tomorrow.
The bond-price drops augment what is already the worst month in more than three years for speculative-grade notes sold by Chinese companies. The debt lost 5.3 percent through yesterday, poised for the biggest monthly setback since September 2011, a Bank of America Merrill Lynch index shows.
“Anything oil-related has little support at the moment,” Chow said today. “The sell off is partly technical owing to poor market sentiment.”
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- January 21, 2015
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