Asset Class Weekly: High Yield Blood Bath

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Includes: ABX, AKS, AMD, APA, AR, ATI, AVP, BBEPQ, BDRBF, BTUUQ, CC, CLF, CLMT, CLR, CNQ, CNX, COP, CRC, CRK, CRZO, CVE, DNR, DPM, DVN, DYN, ECA, EPD, ESV, ETE, ETP, EXXIQ, FCX, FGP, GEL, GNW, HELIQ, HK, HOV, I, IHRT, KMI, LINEQ, LPI, MEMP, MON, MPLX, MPO, MRO, MT, MU, NAV, NBL, NEM, NFX, NGL, NM, OAS, OKE, PACD, PDS, QEP, RIG, RRC, S, SD, SGMS, SM, SN, SSE, SWN, SXL, TLN, TROX, UPLMQ, VIA, VRS, WIN, WLL, WMB, WPX, WPZ, X, XCO
by: Eric Parnell, CFA

Summary

It was just one month ago that I wrote my latest update from the high yield battlefront.

Of course, the last month has seen overall market conditions go from bad to worse.

Following this latest decline, are we now nearing a bottom in the high yield bond market, or is the worst still yet to come?

It was just one month ago that I wrote my latest update from the high yield battlefront. Conditions were already dire with oil prices still hovering just above $38 per barrel. Of course, the last month has seen overall market conditions go from bad to worse. Not only has oil fallen by another -25% to below $30 per barrel, but the high yield bond market itself has shed another -6%. This raises an worthwhile question: following this latest decline, are we now nearing a bottom in the high yield bond market, or is the worst still yet to come?

To find the answer to this question, we will return to the battlefield to assess the latest carnage. For if we are approaching a bottom in high yield, we would expect to see signs of improvement if not at least some stabilization in the deteriorating bond prices among those most struggling in the universe. On the other hand, if we see a further deterioration of bond prices with more companies entering the higher risk categories, this would suggest that we would need to need to see a wave of defaults wash over the sector before we can begin to put the worst of the current decline behind us.

The following is the current status of those companies most at risk in the high yield universe.

Triage

As of the last writing one month ago, we had 11 publicly traded companies that were trading at a more than 75% discount to par. Since that time, two names have fallen into a terminal state, as Arch Coal has since declared bankruptcy and Penn Virginia was delisted. Another in Chesapeake Energy completed debt swaps of unsecured for secured debt, which had the company transferred out of the triage unit at least for now. But in the place of these departures are four new arrivals including California Resources, Halcon Resources, Memorial Production Partners and Sandridge Energy. This brings our new current total in the triage unit up to 12.

Breitburn Energy Partners (NASDAQ:BBEP)

California Resources (NYSE:CRC)

Cliff Natural Resources (NYSE:CLF)

Energy XXI (NASDAQ:EXXI)

Halcon Resources (NYSE:HK)

Linn Energy (NASDAQ:LINE)

Memorial Production Partners (NASDAQ:MEMP)

Peabody Energy (NYSE:BTU)

Sandridge Energy (NYSE:SD)

Seventy Seven Energy (NYSE:SSE)

Ultra Petroleum (NYSE:UPL)

Verso (OTCQB:VRSZ)

The Front Line

Last month we had 18 publicly traded names on the front lines as defined by trading at a highly stressed 50% to 75% discount to their par value. One company in Vantage Energy Services moved straight past triage and declared bankruptcy, and another four of these previous members headed off to triage as noted above. Moreover, several others are on the brink of being transferred next. In addition, five new names have arrived on the list from the second wave including Oasis Petroleum, SM Energy, Talen Energy, Whiting Petroleum and WPX Energy. The new list of 19 names is shown below:

AK Steel (NYSE:AKS)

CHC Group (NYSE:HELI)

Comstock Resources (NYSE:CRK)

Denbury Resources (NYSE:DNR)

Exco Resources (NYSE:XCO)

Genworth Financial (NYSE:GNW)

Intelsat (NYSE:I)

Midstates Petroleum (NYSE:MPO)

Navios Maritime (NYSE:NM)

Oasis Petroleum (NYSE:OAS)

Pacific Drilling (NYSE:PACD)

Sanchez Energy (NYSE:SN)

SM Energy (NYSE:SM)

Talen Energy (NYSE:TLN)

Transocean (NYSE:RIG)

U.S. Steel (NYSE:X)

Whiting Petroleum (NYSE:WLL)

WPX Energy (NYSE:WPX)

The Second Wave

In the next group on the list focusing on companies whose debt is trading at a 25% to 50% discount to par included 25 names one month ago. In the past months since, five names exited this wave for the front line, while thirteen new entrants descended from above. These 32 companies currently headed toward the front lines include the following:

Advanced Micro Devices (NASDAQ:AMD)

Allegheny Technologies (NYSE:ATI)

Antero Resources (NYSE:AR)

ArcelorMittal (NYSE:MT)

Avon Products (NYSE:AVP)

Bombardier (OTCQX:BDRBF)

Calumet Specialty Products (NASDAQ:CLMT)

Carrizo Oil & Gas (NASDAQ:CRZO)

Chemours (NYSE:CC)

CONSOL Energy (NYSE:CNX)

DCP Midstream Partners (NYSE:DPM)

Dynegy (NYSE:DYN)

Energy Transfer Equity (NYSE:ETE)

Ferrellgas Partners (NYSE:FGP)

Genesis Energy (NYSE:GEL)

Hovnanian Enterprises (NYSE:HOV)

iHeart Media (OTCPK:IHRT)

Laredo Petroleum (NYSE:LPI)

Marathon Petroleum (NYSE:MPLX)

Micron Technology (NASDAQ:MU)

Navistar International (NYSE:NAV)

Newfield Exploration (NYSE:NFX)

NGL Energy Partners (NYSE:NGL)

Oneok (NYSE:OKE)

Precision Drilling (NYSE:PDS)

Range Resources (NYSE:RRC)

QEP Resources (NYSE:QEP)

Scientific Games (NASDAQ:SGMS)

Sprint (NYSE:S)

Targa Resource Partners

Tronox (NYSE:TROX)

Windstream (NASDAQ:WIN)

And just as we saw last month, the damage in the corporate credit space is also increasingly spreading into investment grade. Last month we had 13 publicly traded companies whose bonds were trading at a 25% to 50% discount to par. Today, two of those companies - Freeport McMoRan and Continental Resources - have fallen into the Front Line categories with discounts to par in excess of 50%. The rest of the list, which has expanded by 10 to 23, is listed below:

Apache (NYSE:APA)

Barrick Gold (NYSE:ABX)

Canadian Natural Resources (NYSE:CNQ)

Cenovus Energy (NYSE:CVE)

ConocoPhillips (NYSE:COP)

Continental Resources (NYSE:CLR)

Devon Energy (NYSE:DVN)

Encana (NYSE:ECA)

Ensco (NYSE:ESV)

Energy Transfer Partners (NYSE:ETP)

Enterprise Products Partners (NYSE:EPD)

Freeport McMoRan (NYSE:FCX)

Kinder Morgan (NYSE:KMI)

Marathon Oil (NYSE:MRO)

Monsanto (NYSE:MON)

Newmont Mining (NYSE:NEM)

Noble Energy (NYSE:NBL)

Southwestern Energy (NYSE:SWN)

Sunoco Logistics (NYSE:SXL)

Viacom (NASDAQ:VIA)

Williams Companies (NYSE:WMB)

Williams Partners (NYSE:WPZ)

What is perhaps the most stunning about the list above is that it now includes some mega players in the energy space including big dog ConocoPhillips and other major players including Monsanto and Marathon Oil.

Bottom Line

We are seeing absolutely no signs of improvement or even stabilization for that matter in the high yield space. Instead conditions continue to deteriorate in a meaningful way. An ever increasing number of borrowers are showing signs of greater stress across the board without any sign of companies trending in the right direction of seeing stresses alleviate. And not only has the problem now firmly expanded from high yield into the investment grade space, but the scope of the stress has expanded significantly over the past month to include some of the largest names in the industry.

Thus, it remains prudent to stay away from the high yield bond space for the time being. Conditions are likely to get considerably worse before they get better, as the probability continues to rise that we will need to see a wave of bankruptcies wash over some of these at risk names to begin to accelerate the cleansing across the industry in North America. For until we finally see this washout take place, the high yield bond category specifically and the broader market in general are likely to continue to struggle to the downside outside of the occasional upside bounce along the way.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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