The default rate of the S&P/Loan Syndications Trading Association Leveraged Loan Index is nearing 4% as large oil and gas companies California Resources Corp. and Seadrill Partners LLC collectively missed payments on nearly $5 billion of term loans this month, which sent the sector-level default rate to a record high.
The leveraged loan default by issuer count is 3.88%, a near 10-year high. By amount, the rate is currently at a five-year high of 3.70%.
Following these large defaults, the oil and gas sector default rate jumped to a record high of 31%, exceeding the previous February 2018 record of 27%.
California-based oil producer California Resources on July 15 filed for Chapter 11 protection in a bankruptcy court in Houston after it failed to make interest payments on its term loans and second-lien notes. CEO Todd Stevens said the company had significantly reduced "the outsized debt burden we inherited from Occidental Petroleum Corp. at our December 2014 spin-off," which took place just as oil prices commenced a historic and prolonged period of decline.
Following a series of liability management exercises, the company ultimately needed to further reduce its debt burden through a Chapter 11 process given "today's unprecedented market conditions, including oversupply and reduced demand due to COVID-19." The company's bankruptcy plan calls for the elimination of more than $5 billion of its $6 billion debt load.
Seadrill Partners, meanwhile, was recently downgraded by S&P Global Ratings to SD, or selective default, from CCC and a negative outlook, after the company missed a $49 million interest payment due June 30 on its $2.6 billion term loan B due February 2021. The rating on the company's term loan B (L+600, 1% floor after a 2018 amendment) was dropped to D, from CCC, on account of the missed payment, prompting a default in the Index.
The rating agency said it does not believe the interest payment will be made during the 30-day grace period expiring on July 30 as the company has said it is negotiating an agreement with bondholders to capitalize the interest as a liquidity-enhancing move.
S&P Ratings notes that the oil drilling market has been "testing over the past few years," causing Seadrill's capital structure "to become unsustainable." The agency added that the recent drop in oil prices and the pandemic "greatly exacerbated the problem," saying it believes Seadrill is working to "preserve cash ahead of a potential wider debt restructuring."
Finally, with outsized defaults flushed out of the calculation, and a partial retracing of the weighted average bid of oil and gas loans from the March plunge in prices, the sector level distress ratio of performing loans — characterized by loans priced below 80 — has receded from its staggering March high of 82% to 25%.
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Taking a step back from the leveraged loan market, the S&P Global Market Intelligence's probability of default model for the oil and gas industry, which includes companies that trade on major North American exchanges, shows that of the 15 oil and gas concerns with the highest probability of default scores, 13 saw their scores increase significantly since the beginning of the year, and analysts agree that companies both large and small are flashing warning signs.
Again, the Market Intelligence probability of default model looks at a set of oil and gas corporates separately from the S&P/LSTA Leveraged Loan Index. It is included in this analysis to give a broader view of corporate health in the oil and gas sector.
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