For Many High-Yield Issuers, Cheap Oil Is Good News by Gershon Distenfeld,
Who’s helped by low oil prices? When it comes to high-yield issuers, the answer is simple: most of them.
Oil exploration-and-production (E&P) companies are a big exception—and they’re the issuers who have attracted the most attention of late. That makes sense. Oil’s plunge from $100 a barrel in 2014 to less than $50 today has bankrupted many E&P firms, raising the US high-yield default rate as of July to a six-year high of 5.1%, according to Goldman Sachs data.
For the consumer-oriented companies that compose about 70% of the high-yield market, however, cheap oil is good news. In most cases, this is because lower energy prices—and lower gas prices in particular—put money back in consumers’ pockets.
This is partly why we don’t expect the surge in high-yield energy defaults to spill over into the broader market. When consumers spend their gas windfall, it can create tailwinds for a variety of businesses:
Airlines. An obvious winner from lower oil prices—but not necessarily for the reasons you might think. Sure, airlines make more when oil prices drop. But air travel is a competitive business, so most carriers pass on the bulk of those savings to customers in the form of cheaper fares. But they make it up, on volume: lower prices encourage people to take more trips.
Auto-parts makers. As gas prices decline, US consumers are trading in efficient hybrids for gas-guzzling SUVs and pickups. Bigger vehicles require more parts, and that’s good news for auto-parts suppliers.
Restaurants and retailers. According to a JPMorgan Chase analysis of credit and debit card receipts, middle-income US households spent nearly half of the $480 they saved on gas last year on things other than gas. The main beneficiaries? Restaurants and retailers. This doesn’t mean every business will benefit. Many brick-and-mortar retailers, for instance, face offsetting challenges, such as the popularity of online shopping, higher rents and rising healthcare costs. But thorough credit research in these areas may uncover attractive opportunities.
Banks, credit card companies, consumer lenders. A healthier US consumer should be good for any company in the business of making loans. A consumer with more disposable income who can manage debt without defaulting makes for a better investment.
Industrial companies broadly benefit from lower energy prices, too. For these firms, energy is an input cost and essentially acts as a tax on production. When prices fall, it costs companies less to produce their goods—and it lowers the transportation they pay to get their goods to market.
Don’t get us wrong: cheaper oil isn’t a cure-all. That’s why a broad, sector-based approach rarely works in high yield—and why it’s critical to invest on a company-by-company basis.
Investors who take that approach to heart and do their credit homework are likely to find plenty of value in the market today. That’s even true in the energy sector, where some companies will recover more quickly than do others. In our view, those who pull out of the market because of a rise in energy sector defaults are likely to regret it.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.