By Kate Duguid, Mike Spector and Jessica DiNapoli
NEW YORK (Reuters) - Plunging oil prices and the economic fallout from the global coronavirus outbreak are setting the stage for a potential wave of debt restructurings and bankruptcies, especially in the energy and services sectors, according to company advisers and analysts.
Oil prices dropped by a third over the weekend after Saudi Arabia discounted its crude and signalled it would raise output, fuelling concerns about the survival of heavily indebted oil and gas exploration and production companies.
Credit investors pulled money out of the riskiest energy bonds, widening the spread of U.S. junk-rated energy debt over safer Treasuries to the highest since March 2016, the ICE/BofAML U.S. high yield energy index showed.
Oasis Petroleum Inc (O:OAS), Chesapeake Energy Corp (N:CHK) and Whiting Petroleum Corp (N:WLL) were among those hardest hit, with their stocks and bonds losing as much as half their value. The companies did not immediately respond to requests for comment.
"This weekend's developments in the oil market represent a strong additional headwind that will lead to further repricing in risk as well as increasing defaults and downgrades," Credit Suisse (SIX:CSGN) credit analysts wrote in a research note this week.
At the same time, the spread of coronavirus around the world continues to roil global markets and unnerve investors. On Monday, Wall Street suffered its biggest one-day stock market loss since the 2008 financial crisis, only to recoup half of the losses on Tuesday.
Debt-laden companies in service sectors hit by reduced tourism and discretionary spending, such as airlines, cruise lines, movie theatres, gaming companies and hotel chains, are particularly vulnerable, according to Fitch Ratings and restructuring experts.
"We have been busy. The level of activity, it's almost like a switch went on in the last couple of days," said Mohsin Meghji, a managing partner at turnaround firm M-III Partners, who advises companies on restructuring their debt.
Significant debt restructuring activity, which was previously more confined to industries in secular decline, such as brick-and-mortar retailers, is now becoming more widespread, Meghji added.
The U.S. corporate default rate tracked by Moody's Investors Service rose to 4.2% in the fourth quarter of 2019, its highest level since early 2017, when an oil market rout forced a slew of energy companies to seek bankruptcy protection.
About 30% of companies with a risky credit profile have a rating of B-, or highly speculative, compared to 20% at the end of 2015, according to Nick Kraemer, head of ratings performance analytics at S&P Global Ratings.
"There are a lot of companies out there already maxed out and highly levered, and with credit markets seizing up, people are saying this is finally it," said Chris Donoho, global head of law firm Hogan Lovells LLP's restructuring practice.
CRUISES, MOVIE THEATERS
In the leisure sector, Spanish gaming company Codere (MC:CDRE), which has major operations in Italy – epicentre of the coronavirus outbreak in Europe - has nearly $900 million-equivalent of debt in dollars and euros due in November 2021, with the euro tranche trading around 70 cents on the euro, according to Tradeweb. It has fallen nearly 30 points since the start of February - eight of them during Monday's session.
A Codere spokesman said Italy represents only 8% of the company's cash flow, and that the sell-off in the company's debt is attributable to investor concerns the coronavirus outbreak may delay the company's plan to refinance it's high-yield debt.
In-flight wireless internet provider Gogo Inc (O:GOGO) and restaurant chain Dave & Buster's Entertainment Inc (O:PLAY) are among companies in the services sector that saw the biggest stock drops this week. They did not immediately respond to requests for comment.
Standard & Poor's warned on Tuesday that Royal Caribbean Cruises Ltd (N:RCL) could struggle with its debt levels and falling revenue, a few days after Anthony Fauci, the U.S. director of the National Institute of Allergy and Infectious Diseases, advised Americans who are elderly or have underlying medical conditions to avoid cruise ships.
A Royal Caribbean Cruises spokesman pointed to measures the company announced on Tuesday to boost its liquidity. They included raising its revolving credit facility by $550 million and cutting operational costs.
Investors have also punished AMC Entertainment (N:AMC), one of the largest operators of movie theatres globally, as public health authorities ban or advise against public gatherings. Three of the company's four dollar-denominated bonds are now trading just above 60 cents on the dollar, down from around 90 cents in February.
AMC did not immediately respond to a request for comment.