Fitch: Limp Energy/Natural Resource Sectors Lead 3Q Downgrades
OREANDA-NEWS. The energy (oil and gas) and natural resources sectors lead corporate sector downgrades during the third quarter, making up 40% of downgrades, according to Fitch Ratings. Issuers' position on the global cost curve and sound liquidity have differentiated stable larger participants from vulnerable, sometimes smaller, entities.
For the third quarter of 2015 non-financial corporate (corporate) downgrades exceeded upgrades by 1.4x to 1.0x (or 2.0x for the nine months ending September 2015). The downgrade-to-upgrade ratio attributed to changes in the operating/industry profile was 1.2x to 1.0x (nine months ended September 2015: 1.3x). The energy (oil and gas) and natural resources sectors lead corporate sector downgrades, making up 40% of downgrades for the quarter. In several instances, rating actions reflect announced restructurings or the heightened risk of restructuring (including a distressed debt exchange).
Adding to energy woes, coal producers are still struggling with an over supplied coal market. Downgrades in the quarter here included Arch Coal, Peabody Energy, and Indika Energy. Globally, both metallurgical and steam coal markets are in excess supply, pressuring prices. Coal producers are in cost reduction and cash preservation mode and demand from China is starting to weaken. Fitch believes the hard coking coal bench mark price could average below $100.00/tonne (t) and the Newcastle steam coal benchmark could be below $60.00/t over the next 12 months versus current prices of $89.00/t and $67.80/t, respectively, before supply rationalizes.
Exploration and production (E&P) credits remain under pressure. Persistently weak oil prices have continued to lead to project/capital expenditure reduction or delays. This continues to weaken credit profiles within the sector, particularly E&P services and related issuers such as Transocean Inc. (BB+/Stable) Anton Oilfield Service Group (B-/Negative), Honghua Group Ltd. (B/Negative), and Offshore Drilling Holding, S.A. (B+/Negative). Fitch does not expect the situation to improve significantly in the next 12 months given the capex cuts by many oil majors.