The Great Debt Wall Looms; Energy Companies Will Perish Under the Mortar

Sandridge rejected payment on their bonds last week, putting into question the viability of that organization who is saddled with $7.5 billion in debt.

S&P estimates bond holders are likely to be almost completely wiped out in the next wave of defaults to the tune of 90%. These are harsh drawdowns, even for highly distressed companies, indicative of the fact that the collateral by which these loans were secured are all but worthless.

Banks are setting aside more money to cover potential losses on souring energy loans. S&P estimates that credit lines to these companies could be cut by 30 percent by April, when banks conduct one of their twice-yearly evaluations of their loans.

“We are at the very beginning of the next wave of energy defaults,” said Paul Halpern, chief investment officer at Versa Capital Management, which manages about $1.5 billion of distressed debt.

Of the $197 billion in shale oil debt, $101 billion is considered to be junk, a number that is sure to climb. Moreover, a number of likely defaults in the United States haven’t been this perverse since the wonder years of 2008-2009, whereby we all enjoyed the indefinite suspension of western finance.

According to data provided by Exodus, the following companies are very likely to default on their obligations.

SDRL: $12 billion
CHK: $11.6 billion
PAGP: $11 billion
LINE: $10 billion
CRC: $6.4 billion
BTU: $6.2 billion
WLL: $5.2 billion

In all, the amount of debt likely to be reorganized over the next 5 years could top a trillion dollars.