Wall Street’s Oil Debt Bubble Is Breaking, Bankruptcies Accelerate
Nov. 23, 2015 (EIRNS)—Today’s Houston Chronicle reported that 37 oil drilling/oilfield supply companies in the United States, with $13 billion in total debt, have gone bankrupt from August through October, 16 of them in Texas; and that about 40 more are "on the brink now," according to Dallas law firm Haynes & Boone. Five more defaulted in the first two weeks of November. By early 2016 the failures will exceed the total of those in 2009 after the bank crash. As the Chronicle notes, a recent report by U.S. regulatory agencies including the Office of the Controller of the Currency estimated that there is $35 billion more in bad debt in this sector as of now.
With the overall Bloomberg index of commodity prices having just reached another 16-year low in spite of Saudi Arabia’s pledge over the weekend to "work with OPEC ... whatever it takes," the condition of high-yield and junk debt is approaching the blowout stage. There is more than $1.8 trillion of that debt in the U.S. economy and one-third of that is in the energy sector, where it is now concentrated in the lower grades of junk. Moody’s reported that in this quarter so far, downgrades of high-yield corporate debt are outnumbering upgrades 3:1, with 57 vs. 18. The default rate on all energy high-yield debt is 6%, according to Fitch Ratings; in metals/mining, it is 14%.
High-yield debt issuance has stopped completely in October-November, as the St. Louis Fed reported that the average interest rate on low-rated corporate debt is 14.75%; in other words, these companies can no longer refinance at all, and must default.
As for corporate debt as a whole, Moody’s noted that at the end of 2013, U.S. corporations’ net debt (debt minus cash) was $1.8 trillion and their net earnings were $1.8 trillion. In October 2015, corporations’ net debt was $2.5 trillion and rising quickly, and their net earnings were still $1.8 trillion and now actually falling slightly.
It’s explicable, then, that U.S. industrial production fell again in October, by 0.3%, and is completely flat from one year ago, according to the Commerce Department. Today the Chicago Fed’s National Economic Activity Index continued the run of recession news, showing economic contraction for the third month in a row, and the eighth month out of ten this year.