Oil Surge Pressures Junk Borrowers, Sends Default Swaps Surging

Published 7 March 2022, 07:26:08.102 GMT

(Bloomberg) -- Surging oil prices are ratcheting up risks for weaker issuers by raising the specter of a slowdown in global economic growth coupled with accelerating inflation.

A Bloomberg multi-currency gauge for junk bonds dropped to its lowest since May 2020 last week. In a sign of tension building further, the cost to insure Asia’s investment-grade dollar bonds outside Japan against default jumped Monday, putting it on track for the steepest daily increase in about six months.

“A loss of growth momentum at a time of high inflation is negative for asset markets,” Taimur Baig, chief economist at DBS Bank Ltd. wrote. “Russia and Ukraine’s outsized role in energy and food-grain supply has spooked markets.”

Risk assets in Asia sold off on concerns about the effects disrupted oil supplies. The Biden administration is considering whether to prohibit Russian oil imports into the U.S. without the participation of allies in Europe, at least initially, according to two people familiar with the matter.

Even before news of a possible oil embargo, the International Monetary Fund had warned the invasion of Ukraine and the subsequent sanctions imposed upon Russian President Vladimir Putin’s country would have a “severe impact” on the global economy.

As sanctions on Russia and countermeasures impede companies’ ability to service debt, emerging-market corporate credit may have the highest default rate in more than a decade this year, according to Citigroup Inc. strategists.

The feverish price run-up in everything from oil to grains and metals is adding to price pressures that in many places were elevated even before Russia invaded Ukraine.

In the U.S., Federal Reserve Chair Jerome Powell is trying to balance uncertainty over the Ukraine war with political demands back home to move faster on inflation.

The Fed could hike rates this month, which would push up the cost of dollar funding for corporates around the globe.

Already, primary issuance has slowed as companies brace for the increase. 

Higher U.S. rates and surging price of oil “may significantly impact corporate credit profiles, leading to the prospect of heightened defaults,” said Charles Macgregor, head of Asia at Lucror Analytics in Singapore.

By Finbarr Flynn