Oil Price Plunge Slams Energy Companies' High-Yield Bonds

NEW YORK (TheStreet) -- The drop in oil prices has had an outsized impact on the high-yield bond market, notes Martin Fridson, a well-known junk bond number cruncher.

"The market thinks that just about half of the next 12 months' defaults will come from Energy, an industry that accounts for only a sixth -- 181 out of 1,089 -- of high-yield issuers," Fridson wrote in a research note for S&P Capital IQ published early Wednesday.

Oil prices, which have been falling since July, continued to to plunge last week after OPEC was unable to agree on production cuts. West Texas Intermediate crude oil prices hit a low of $63.95 on Monday and have since come back slightly, nearing $68 on Wednesday.

Fridson notes that prices of energy junk bonds are out of whack with their credit ratings, though he doesn't indicate where he stands.

"Seeing Energy as a value depends on agreeing with the rating agencies' still sanguine view. Bear in mind, though, that many high-yield Energy issuers are oriented to natural gas and therefore are less directly affected by the oil-price plunge," he writes.

Those who want to buy junk bonds with considerably less exposure to oil prices should look at European junk bonds, Fridson suggests. He notes that "one out of six issuers in the [Bank of America Merrill Lynch US High Yield Index] is an energy company, while the corresponding reading for the [Bank of America Merrill Lynch Euro High Yield Index] is one in 74."

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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