Distressed Digest

August 23th 2020

Currently tracking 225 credits from 132 companies.

If you wish to view the Distressed Watchlist within Google Sheets, please request access to it and I will shortly grant you access to it.

https://docs.google.com/spreadsheets/d/17CE82ulzQX9KuRBMBeWXdyyx6LSjXqdaTepEc27A-8s/edit#gid=1148751060

Leaders for the Week

Laggards for the Week

Highlights

  • CBL & Associates (CBL) filed for bankruptcy shortly after paying interest on some of its unsecured notes earlier this month. CBL unsecured notes finally traded higher this week by 12.5pts to mid 30s.
  • Washington Prime Group (WPG 6.45 ’24) saw its unsecured notes trade higher this week by 9pts to 48.
  • Party City (PRTY) saw its debt traded higher this week. The new exchange secured notes traded up 4pts to 61 while the stub unsecured notes traded up 5-7pts to 25 on very light volume.
  • Golden Nugget (LNY 8.75 ’25) continue to trend higher and ended the week gaining another 4.5pts to 71.50 yielding 17.4%.
  • After not trading once in the last 6 weeks, Goodman Networks (GGHI 8 ’22) traded up 30pts to 50.00.
  • Transocean (RIG) unsecured notes traded lower off as the company looks to restructure its capital structure in an effort to avoid bankruptcy. RIG 7.00 ’28 traded down 12.5pts to 25 while the RIG 8.375 ’21 traded down 32pts to 40.
  • Peabody Energy (BTU) secured debt continues to fall. BTU 6.375 ’25 traded down 16pts to 34.00. The long-dated secured notes traded as high as 80 in the beginning of this year and in the high 50s in June.
  • Mallinckrodt (MNK 5.75 ’22) traded lower by 5pts to 17.50 as trading remains very volatile.

#Energy sucks

Recently, I posted a YTD total return performance chart of the S&P 500 Energy Sector ETF (XLE) comparing against he S&P 500 (SPY) and Nasdaq 100 (QQQ).

“Wow! Energy sucks.” was my initial thought.

After the initial shock was over, I began to think, “When has energy stocks or credit outperformance their respective markets?”.

Investing in Energy Stocks via ETFs

In the Russell 1000 & 2000 there are 112 energy companies to invest in. Yet, investors have plenty of ETF options available to them to get exposure to energy.

One of the largest energy ETF is the S&P 500 Energy Sector ETF (XLE). The fund has over $10B in assets under management and holds large-cap energy equities. Approximately 45% of its holdings are in two mega-cap energy companies, Exxon-Mobile (XOM) and Chevron (CVX).

Another popular ETF used to track companies within energy is the S&P Oil & Gas Exploration & Production ETF (XOP). This ETF includes a bit more diverse group and size of oil & gas companies.

This poor performance has not been recent. Over the last 10 calendar years, total returns have underperformed against the S&P 500 in almost every year.

Investing in Energy Fixed Income (Corporate Credit)

It is hard to find a pure play publicly-traded energy credit ETFs or mutual funds. For total return performance analysis, I prefer to use S&P Bond Indices, which track both the corporate bond market and its various sectors.

Shown below are various return periods up to 10-years. These indices main holdings are within investment grade securities but also include some high yield.

For the current year of 2020, the Energy Corporate Bond Index is only up 1.95%, underperforming the overall Bond Index by -596bp. The index’s 1-year and 3-year performance has also been the worst performing sector bond index, underperforming the Total Bond index by -545bp and -149bp, respectively.

For this year, the S&P Energy Corporate Bond Index is only up 1.95%, which is underperforming the Total Bond Index by -596bp. Both the index’s 1-year and 3-year performance has also been lackluster as the it trails the Total Bond Index by -545bp and -149bp, respectively.

Investing in High Yield Energy (Corporate Credit)

Now time to check the performance of High Yield Energy vs US Total High Yield Index.

There are a limited number of publicly available indices to track high yield energy. The only one that I am aware of is the Bloomberg Barclays High Yield Energy TR Index. Investors without access to a Bloomberg terminal can access up to 5 years of historical data.

On Koyfin, we offer a curated Koyfin CORP dashboard which tracks the ICE BofA Corporate Credit Indices. Later in 2021, we plan to offer more comprehensive fixed income data.

Below is the BofA US High Yield Index Total Return, which I will use as a measure performance of the total high yield market.

When comparing returns of the High Yield Energy Index against the High Yield Total Index, it shown Energy has underperformed.

If you are interested to see some of the current high-yield distressed energy credits, you can see them below or within the Distressed Watchlist which I update each week.

Depressed Energy Commodity Prices

Since the 2014 collapse of $100 oil, West Texas Intermediate Crude Oil has traded below $60 a barrel for the majority of the time. The depressed price of oil has forced many companies to seek reorganization through bankruptcy as well as leading to some liquidating.

While oil production makes up the largest part of the energy sector, natural gas is the second most important. Adding the energy’s woes has been the steady decline in the price of natural gas. Warmer winters in the US and over supply has brought the price of natural gas to its lowest levels ever.

Conclusion

If there is not an increase in energy commodity prices, some expect there could be hundreds of more energy bankruptcies over the next 18 months. Yet in the short-term, this has not stopped investors from trying to find some value within energy.

As liquidity remains high in the market, investors will continue to seek the potential long-term winners and survivors. The disappearance of weaker players could fuel greater returns for stronger. Discounted share prices and double-digit bond yields have great risk but could provide great reward.