OREANDA-NEWS. High yield energy companies have more concerns than just the continued low price of crude oil, Fitch says, noting that it is becoming more expensive for them to issue bonds. The par weighted average coupon for the energy sector during the first quarter surpassed the overall non-financial HY corporate level for the first time since 2011.

HY energy bonds ended 1Q with a 7.3% par weighted average coupon, well above the 6.2% figure over the same period in 2014 and nearly 160 basis points higher than its 2013 nadir. Energy companies issued \$13.2 billion in HY bonds during the first quarter 2015, an 86% increase compared to the first quarter 2014.

Comparatively, the par weighted coupon for the entire HY corporate universe averaged 6.6% during the first quarter. From 2012-2014, all HY corporates featured an average par weighted coupon that was roughly 40 basis points higher than in the energy sector.

Energy companies are now grappling with additional financial constraints as the price of crude oil continues to languish - 85% of energy companies that completed 1Q bond deals paid a higher coupon than they did on their existing bonds. These issuers are incurring greater interest costs relative to previous years as revenues and cash flows come under pressure from the weak commodity prices.

Downgrades via fallen angels further propelled the size of the HY energy bond universe, and the sector now makes up 18% of the HY market. Since the end of last year, energy debt outstanding rose 20% to \$260 billion while the rest of the HY universe grew just 3%.

The trailing 12-month (TTM) HY default rate finished March at 3.4%, unchanged for the second consecutive month. The TTM rate will fall to 2.1% when Energy Future Holdings (EFH) comes off the default list at the end of April because the bankruptcy filing date occurred more than one year ago.

While the overall rate will decline next month due to EFH's removal, the energy, and especially the exploration and production (E&P), default rates are increasing, and Fitch expects the sector default rate to continue to rise.

TTM March rates were 0.9% and 1.7% for energy and E&P, respectively, as March bankruptcy filings for Quicksilver Resources and Dune Energy contributed to higher default rates. American Eagle Energy and RAAM Global Energy Co. recently missed interest payments and potential defaults for Connacher Oil and Gas, Samson Investment Co., and Sabine Oil and Gas LLC loom as restructuring talks are underway.

The TTM energy institutional leveraged loan default rate was at 1.6% at the end of March. Quicksilver and Cal Dive International were the first energy defaults since Preferred Sands in December 2013. Many below-investment-grade E&P companies rely on asset-backed revolvers and the sector has been relatively inactive in the institutional term loan market.

Overall, the TTM institutional leveraged loan default rate is 3.6%. However, removing EFH and Caesars Entertainment Operating Co. lowers the mark to 0.8%.

More information will be available in Fitch's "U.S. High Yield Default Insight", "U.S. Leveraged Loan Default Insight" and "Energy and Commodity Bankruptcy Enterprise Valuation and Creditor Recovery Case Study" reports to be published later this month.