The majority of mainstream commentary has focused on the dramatic fall in the oil price, the share price carnage in energy stocks and a potential boost to consumers. However, the financial sector will be watching developments nervously. Unfortunately, if commodity price forecasts have gone pear-shaped it is increasingly likely that capital ploughed into the sector will face losses.
And that’s a big deal for the US high yield bond market. The shale gas/oil sector has been the recipient of enormous amounts of investment capital in the form of debt. Barclays have provided a striking graphic of the growing proportion of the $1.3 trillion high yield bond market which has been sunk into energy. In the chart below one can see the weighting of energy debt has trebled from circa 5% to 15%!!
Wowzers! That’s close to $200 billion of bonds exposed to the energy sector and the second highest in the entire market after the 18% exposed to telecoms(more on that later!). For context, that $200 billion is approximately half the size of the sub-prime market in 2007. Let’s just say the combination of a cash flow/returns shock, illiquid markets(bank trading desk shrinkage) and highly leveraged exploration vehicles could become rather toxic.
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