Outlook 2020: PG&E looks for exit; energy sees further risk; telecoms on the brink

By James McCandless

San Antonio, Dec. 31 – The distressed debt market, trading in securities of underperforming companies at a baseline of 1,000 basis points above low-risk corporate bonds, retained many of the same focal points from the previous year, doling out much of the volume in the utilities, oil and gas, telecommunications and pharmaceuticals.

The S&P U.S. High Yield Corporate Distressed Bond index, as of Dec. 12, was showing a return of minus 7.80% in the year to date.

Traders and market professionals interviewed by Prospect News painted a picture of a distressed space poised for further negativity in 2020, extending the trends of this year.

PG&E seeks exit

Arguably the most high-profile bankruptcy of 2019, electric utility PG&E Corp. announced a Chapter 11 filing two weeks into January.

After wildfires from 2017 and 2018 in Northern California, the company said that it faced billions in potential liabilities.

“In the week or so afterward, that was the only thing that was trading,” a trader said. “I think that’s why it was contained to them and didn’t bleed out to others in the sector. There was just so much of its own paper.”

Activity centered on PG&E’s 6.05% notes due 2034, which were quickly established as a bellwether for the structure.

The week before the bankruptcy filing, the notes were trading in the 90’s context, hitting a low at 80¼ bid on the day of the announcement before making the long climb back up.

In the following months, the company would begin a year-long process to come to agreements with a variety of stakeholders in order to move forward with its reorganization plan.

The name hit a snag in October when a bankruptcy judge stripped the company of its exclusive right to submit a bankruptcy plan, followed by more wildfire trouble.

The judge in its bankruptcy eventually ordered mediation between parties hoping to strike a restructuring deal while it faces the threat of increased oversight from California regulators.

In December, billions in settlements were agreed to with insurance carriers, government entities and wildfire victims.

“They are exiting bankruptcy one way or another next year,” the trader said. “But a lot of noise will be made and a lot of money will be spent.”

Energy risky

Crude oil prices were steadily climbing in the first half of the year, though a sharp drop contributed to weakness in the sector and several bankruptcies.

The sector remains in a holding pattern though, not strong enough to protect weaker firms and above extended downturn territory since 2017.

West Texas Intermediate crude oil hit a ceiling at $66.00 per barrel in April, spending the rest of the year in the low-to-mid 50’s context.

In that context, EP Energy Corp., Sanchez Energy Corp. and Weatherford International plc filed, as did dozens of others.

One of the more dramatic drops started in the summer, when McDermott International, Inc. showed a dismal second-quarter loss and cut its guidance.

The company’s 10 5/8% senior notes due 2024, which had been trading just shy of par at that point, fell into the 70’s.

Later on, the notes would crash into the 30’s and below after news broke that it had hired restructuring advisers.

After forgoing an interest payment on Dec. 1, the company is expected to default.

In a December note, Fitch Ratings characterized the energy sector going into 2020 as “reasonably strong, but softening.”

The U.S. Energy Information Agency expects WTI futures to average at $55.00 per barrel as OPEC committed to extending production cuts in order to provide stability to the energy markets.

“Just like this year and the year before that, the names that are in trouble are the ones that are over-levered and can’t keep up,” a market source said.

Telecoms under pressure

Maintaining a high level of trading in 2019, Intelsat SA’s paper spent most of the year hovering in the 70’s and 80’s context before diving in the final months.

Intelsat (Luxembourg) SA’s 8 1/8% senior notes due 2023 fell into the 40’s context after the company fought and lost an effort to convince the U.S. government to carry out a private auction for C-band spectrum.

The name, as part of a consortium called the C-Band Alliance, had proposed to give a portion of the proceeds from a private auction back to the Treasury.

The Federal Communications Commission decided on holding a public auction, with terms to be set at a later date.

In a note, Deloitte analyst Kevin Westcott said that increased regulatory oversight on a global scale poses an increased risk to names in the sector going into 2020.

Also, wireline name Frontier Communications Corp.’s notes were dragged lower as a constant this year.

Amid a string of dismal earnings reports, the company has wrangled with creditors on how to handle its debt load.

Major holder Aurelius argued that the best solution for it would be an out-of-court debt exchange.

In November, the company drew down the remaining $499 million available under its $850 million revolving credit facility, leading many to expect an imminent filing.

Pharma generics on watch

Facing headwinds going into the new year, generic pharmaceutical names are poised to see more of the same weakness.

As the industry reckons with the opioid epidemic and consumers become more concerned about drug prices, generic drug names see the most downside risk.

“Generic drug companies will face ongoing price erosion due to customers' negotiating leverage, but pressures are easing somewhat,” according to a Moody’s analysis.

Over the summer, Mallinckrodt plc and Endo International plc were hit with thousands of lawsuits from government entities across the country.

Mallinckrodt’s 4.875% senior notes due 2020 had been trading in the 90’s context until August, then crashed into the 60’s as the company tried to reassure investors and settle claims.

“With stronger names in the pharma space, recent settlements have eased some people because they think the risk is behind them,” a trader said. “That thought isn’t there for generics who are over-levered.”

The generic industry also faces a challenge from the U.S. Department of Justice, which has opened a criminal investigation into several generic producers over their roles in the opioid epidemic.

© 2015 Prospect News.
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