Debt in the oil producing companies may end up being the straw that breaks the camel’s back. Snapping up $50 billion of high-yielding U.S. junk-bond offerings by energy companies this year may have seemed like a good idea when oil was above $100 a barrel and yields were at record lows.
With prices falling toward $80, bond buyers are burdened by over $2 billion of lost market value and growing concern that too much credit has been extended too fast amidst America’s shale boom. As the borrowing capacity of oil and gas producers are directly tied to the value of their reserves, the falling commodity prices are increasing the risk that companies will face as prices fall and profits drop. Junk bonds sold in the U.S. this year have on average lost more than 4 percent of their market value since issuance