Fonte/Source: Equities.com, Britain’s leading fund manager, Neil Woodford, has warned that falling oil prices could prompt a rout in the global bond market as shale companies default on vast debts built up during the US fracking boom.
The extraordinary surge in shale oil production in the US has been largely financed by multibillion-dollar bonds issued on Wall Street and in the City. Fears are growing that independent drillers may now default on their $200bn (pounds 130bn) in borrowings, creating a contagion in junk bond markets akin to the sub-prime mortgage collapse. Woodford said: “The full impact of the dramatic fall in oil prices is still unfolding. Clearly, some oil producing nations have been hit really hard – Russia, in particular, looks on the brink of a very serious crisis. But the problems are much more widespread – the US shale boom, for instance, is significantly threatened. Much of US shale production is not economic at current oil prices and the sell-off in junk bonds reflects the degree to which the shale boom has been financed by debt, much of which now may not be repaid.” Bonds issued by shale oil companies make up 15% of all “high-yield” or junk bonds in the US, having grown from virtually zero five years ago.
The bonds were much sought after by institutions such as pension funds wanting higher interest rates than those on offer from more conventional corporate and government bonds.
The alarm sounded by Woodford, seen as one of the most astute investors of his generation, adds to a warning by the Bank of England in its half-yearly assessment of dangers to the financial system. Mark Carney, the Bank governor, said falling oil prices were a net positive for the economy. But he added: “The risk around oil prices only really starts to become material if they breed further contagion.”
A sell-off in energy bonds could also have a knock-on effect on the wider junk bond market. The credit rating agencies, whose reputation was shredded when they failed to spot the systemic risks posed by sub-prime mortgage securities, have also been highlighting the dangers in the energy bond market.
Most of the bonds have been issued by small and medium-sized drillers, rather than the oil majors, and few have the financial reserves to maintain payments if the oil price fails to pick up or slides further.
Yesterday, the benchmark North Sea Brent oil was trading at around $57 a barrel, a five-year low. Among the most exposed bonds are those issued by firms that transport oil, which, according to rating agency Moody’s, have fewer investor safeguards than conventional bonds.
Debt research firm CreditSights Inc is predicting a doubling in defaults next year.
Woodford is also warning investors to steer clear of the oil majors, such as BP and Shell, in 2015. “I have avoided the oil majors for some time – some have high yields which I believed were unsustainable when oil was priced above $100 per barrel. At current oil prices, dividends from the oil majors are at risk. These companies will either have to cut capex [capital expenditure] substantially further, and by implication future growth, or the dividend – neither option looks particularly good news for shareholders.” Woodford presided over pounds 30bn in investors’ cash while at Invesco Perpetual before starting his own boutique investment house, Woodford Funds, which has swiftly built up pounds 8bn in assets since launching in June.
His outlook for 2015 includes: * A prediction that tobacco company shares will continue to outperform. “Tobacco stocks are prominent in my portfolio principally because the market continues to profoundly undervalue their dependable qualities,” Woodford said. “The demand for their products is very consistent and predictable; they aren’t capital intensive businesses; they generate lots of cash; they pay sustainable and growing dividends; they don’t have to worry about new entrants; and they have significant pricing power. “These businesses are made for the current environment – they can continue to grow despite the tricky economic conditions we are likely to experience over the next few years. This isn’t so much a call about prospects for 2015, because my investment horizons are significantly longer than that. My conviction in the investment case is much greater on a five- to 10-year view.”
* Energy, banks and mining remain no-go areas. “I have little or no exposure to sectors such as energy, banks and mining. All of these industries face a very challenging future in terms of cash flows and ultimately dividends which, in my view, isn’t yet fully reflected in share prices. “I remain unconvinced of the investment attractions of the more mainstream high street banks. I sold HSBC in August over concerns about ‘fine inflation’ in the banking industry and I don’t think that story has fully played out yet. Meanwhile, the likes of RBS and Lloyds (which I haven’t held for a very long time) still look many years away from paying sustainable dividends.” But in early December, Woodford became a cornerstone investor in an online bank startup which is expected to launch in the second half of 2015. “I recently invested in Atom Bank, a new ‘challenger’ bank with a purely digital business model. “In some ways it’s similar to my own business here at Woodford Investment Management in that it has started with a clean slate and because of that is freed from the burden of legacy infrastructure costs. Atom is a very small position in the overall portfolio, however.”
* It’s not the time to go back into Tesco. “Tesco has fallen a long way but it still represents a pretty risky proposition, in my view, as does the wider sector. Tesco has faced its own set of internal issues and is probably now doing the right things to put them right, but history suggests that resolving them will take a long time. “More broadly, the food retail industry still suffers from over-capacity in my view and continues to face increased competition from discounters such as Aldi and Lidl, falling food prices, and the risk of a prolonged spell of margin pressure. As always, there is intense competition for capital in my portfolios and I am much more convinced about investment opportunities elsewhere.”