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 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 <CLc1>,
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.
"Market pricing suggests almost one out of every two high-yield
energy issuers will default," said Michael Buchanan, head of global
credit at Western Asset Management Co., citing his firm's
proprietary valuation model. "Anything less than that is a win for
investors."
Investors have pulled about $270 million from Buchanan's Western
Asset Short Duration High Income Fund <SHIBX.O> this year according
to Lipper data, part of a roughly $6 billion outflow from U.S.-based
high-yield mutual funds. Buchanan's fund had $840 million in assets
at the end of last month.
PICKING THE SURVIVORS
Yet unlike many oil executives and Wall Street analysts who brace
themselves for a "low for longer" scenario, Buchanan expects cheap
oil to force production cuts and help prices recover to between $60
and $70 a barrel over the next year or two.
He also said his fund had invested in energy firms that had access
to credit and ample cash relative to their spending, posing a low
risk of default even if oil prices remain low.
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Kathleen Gaffney, who has managed the Eaton Vance Bond Fund since
its launch in January 2013, said she also focuses on the likely
high-yield survivors. Such bets could produce gains of more than 30
percent over the next two years, she said. Among the $1.2 billion
fund's assets is a 1 percent investment in convertible bonds in
Chesapeake Energy Corp.
"There will be survivors, and I think Chesapeake is one of them,"
Gaffney said.
Patrick Maldari, senior fixed income investment specialist at
Aberdeen Asset Management, said his team running the $1.3 billion
Aberdeen Global High Income Fund favored companies with access to
revolving credit facilities as a feature that improved their odds of
riding out the slump.
Some funds betting on high-yield energy bonds still managed to eke
out gains. The $74.6 million Morgan Stanley Institutional Fund Trust
High Yield Portfolio, which counted Baytex Energy Corp. and Carrizo
Oil & Gas among its credits as of Sept.30 is up 2.9 percent so far
this year beating 96 percent of peers, according to Morningstar.
Its winning formula?
Richard Lindquist, who oversees the fund, says it focuses on
higher-quality credits that have hedged future production and
operate in low-cost areas such as the Permian, Eagle Ford and
Marcellus basins.
Even those in the red like Gaffney, whose fund is down 10 percent so
far this year, are not giving up, saying many investors are too
pessimistic about global growth and prospects of some companies.
"The whole sector has been painted with a very broad brush."
(Reporting by Sam Forgione; Editing by David Gaffen and Tomasz
Janowski)
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