Over the past 5 years, aggressive central bank ‘stimulus’ policies have fuelled a rampage of cheap money into many asset classes, forcing prices up and income yields down. A prime beneficiary of the ‘free money’ orgy has been speculative grade companies (rated Ba1 and lower by Moody’s and BB+ and lower by Standard & Poor’s) who issued record amounts of debt to indiscriminate buyers.
Capital-intensive energy companies were some of the most active issuers. Rapidly expanding operations, employment in the energy sector surged 70% since the US recovery began in 2009 and contributed the lion share of well paying job growth.
And then the plot thickened. As West Texas Crude plunged 43% over the past 5 months (so far) cash flow has evaporated and borrowing costs for energy companies have nearly doubled from just 5.7% in June to 9.5% this week (Bank of America Merrill Lynch index data). All of a sudden, companies are realizing that their debt payments are massive. At the same time investor interest has dried up, and companies with B ratings and less are being cut off from bond issuance and forced into asset sales and credit lines to pay their bills.
Bubble policies have struck again. Reminding once more of that timeless dialogue from Hemingway’s 1926 novel, The Sun Also Rises: “How did you go bankrupt?” “Two ways: gradually and then suddenly.”
Human behaviour around debt, is nothing if not consistent. See: Fed Bubble bursts in $550 Billion of Energy Debt