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By Sam Forgione
NEW YORK, Oct 26 (Reuters) - High-yield energy bonds are on
track for their worst year since the global financial crisis yet
some funds are holding on, convinced that markets underestimate
the ability of many oil companies to ride out the crude price
slump.
Some money managers such as Western Asset Management Co.,
Eaton Vance Corp. and Aberdeen Asset Management have broadly
held on to their investments in bonds of oil and gas producers
throughout the year even as now they lag more than 95 percent of
their peers, according to Morningstar data.
Their exposure to energy is around 10 percent or more, with
varying shares of that in high-yield energy debt.
The average yield on U.S. high-yield E&P credits has risen
to 13.7 percent through Friday from 10.6 percent at the end of
last year, according to Barclays (L:BARC) PLC. That increase reflects
fears that many companies will struggle with financing their
operations and servicing their debt with oil stuck at around $45
a barrel CLc1 , less than half of last year's highs.
The Barclays U.S. High Yield Energy Index is down 8.6
percent so far this year through Friday, putting it on track for
its worst yearly loss since 2008.
As of Sept. 30, 8.5 percent of the $117 billion of
outstanding high-yield debt issued by U.S. oil and gas firms was
in default, either because they missed payments to bondholders,
entered bankruptcy or conducted a distressed debt exchange
according to Fitch Ratings, a record high since it began
tracking the data in 2000.
With oil near its six-year lows, many investors expect those
numbers to go up and avoid the sector altogether. Some, however,
say the market is too pessimistic about oil prices and
producers' resilience and maintain bets on selected energy
bonds, even if it means being stuck in the red so far this year.
"Market pricing suggests almost one out of every two
high-yield energy issuers will default," said Michael Buchanan,
head of global credit at Western Asset Management Co., citing
his firm's proprietary valuation model. "Anything less than that
is a win for investors."
Investors have pulled about $270 million from Buchanan's
Western Asset Short Duration High Income Fund SHIBX.O this
year according to Lipper data, part of a roughly $6 billion
outflow from U.S.-based high-yield mutual funds. Buchanan's fund
had $840 million in assets at the end of last month.
PICKING THE SURVIVORS
Yet unlike many oil executives and Wall Street analysts who
brace themselves for a "low for longer" scenario, Buchanan
expects cheap oil to force production cuts and help prices
recover to between $60 and $70 a barrel over the next year or
two.
He also said his fund had invested in energy firms that
had access to credit and ample cash relative to their spending,
posing a low risk of default even if oil prices remain low.
Kathleen Gaffney, who has managed the Eaton Vance Bond Fund
EVBAX.O since its launch in January 2013, said she also
focuses on the likely high-yield survivors. Such bets could
produce gains of more than 30 percent over the next two years,
she said. Among the $1.2 billion fund's assets is a 1 percent
investment in convertible bonds in Chesapeake Energy Corp (N:CHK)
CHK.N .
"There will be survivors, and I think Chesapeake is one of
them," Gaffney said.
Patrick Maldari, senior fixed income investment specialist
at Aberdeen Asset Management, said his team running the $1.3
billion Aberdeen Global High Income Fund BJBHX.O favored
companies with access to revolving credit facilities as a
feature that improved their odds of riding out the slump.
Some funds betting on high-yield energy bonds still managed
to eke out gains. The $74.6 million Morgan Stanley (N:MS) Institutional
Fund Trust High Yield Portfolio, which counted Baytex Energy
Corp. BTE.TO and Carrizo Oil & Gas CRZO.O among its credits
as of Sept.30 is up 2.9 percent so far this year beating 96
percent of peers, according to Morningstar.
Its winning formula?
Richard Lindquist, who oversees the fund, says it focuses on
higher-quality credits that have hedged future production and
operate in low-cost areas such as the Permian, Eagle Ford and
Marcellus basins.
Even those in the red like Gaffney, whose fund is down 10
percent so far this year, are not giving up, saying many
investors are too pessimistic about global growth and prospects
of some companies.
"The whole sector has been painted with a very broad brush."