Wave of Defaults, Bankruptcies Spooks Bond Investors

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

First things first: Investor desperation for yield, any discernible yield no matter what the risks, and blind confidence that all this will work out somehow are waning.

Now questions pop up here and there, and investors are beginning to open their eyes just a tad amid waves of defaults and bankruptcies, after years of worriless fixed-income bliss during which cheap new money made investors forgive and forget all sins of the past. But now investors are pulling big chunks of money out.

For the week ended June 17, investors yanked “a whopping” $2.9 billion out of junk bond funds, according to S&P Capital IQ/ LCD’s HighYieldBond.com, on top of the $2.6 billion they’d yanked out in the prior week. Those redemptions dragged down the year-to-date inflows to $3.6 billion, nearly 40% below last year at this time. But $201.5 billion remain in those funds.

Leverage-loan funds have been plagued by outflows as investors have been warned for a couple of years about their risks. Banks extend high-risk loans to over-indebted, junk-rated companies but don’t want to keep these iffy loans on their books. So they sell them to loan funds or repackage them into CLOs and then sell them. Even the Fed has gotten concerned. This week brought more of the same, with $311 million leaving leveraged-loan funds, bringing year-to-date outflows to $3.6 billion. Total fund assets are now down to $94 billion.

On the investment-grade side, it didn’t look pretty either. Business Insider cited Bank of America Merrill Lynch strategists: “High grade credit funds suffered their biggest outflow this year, and double the previous week.” The biggest outflows since the Taper Tantrum in June 2013. There was more doom and gloom:

However, government bond funds suffered the most amid the recent spike in volatility, with outflows surging to the highest weekly number on record ($2.7bn). This brings the total outflow from fixed income funds to almost $6bn over the last week, the highest since the Taper Tantrum and the third highest outflow ever.”

Why the sudden bouts caution?

The Fed? Maybe not. The Fed’s cacophony about raising rates keeps pushing that point further out into the future. Voices are clamoring for many more years of easy money, and some promote the idea that rates should never rise, or could never rise, in any significant manner, or to what might have been considered more normal levels a decade ago, because, after six years of these ingenious easy-money polices, businesses, governments, and consumers have taken on so much debt that higher rates would bankrupt them.

Besides, when or if the Fed finally has what it takes to raise the rates, it would go from nothing to nearly nothing very slowly, as Fed gurus explain relentlessly. So not all that much to be spooked about.

Or could the public anxieties about liquidity have spooked investors into selling their bond funds? The idea would be to sell while there is still liquidity. When the real selling starts, liquidity dries up, and then it’s too late. Once prices have dropped enough, liquidity magically returns. Not a promising thought for investors sitting on a ton of bonds.

But there is another reason: a nerve-wracking wave of corporate defaults and bankruptcies. And not all are in the energy sector.

Late yesterday, oil-and-gas producer Saratoga Resources, which has had two bond issues in default, filed for Chapter 11 bankruptcy protection, blaming a variety of operating issues, an arbitration award against the company, and the plunge in oil and gas prices. It’s the second time Saratoga has danced to this tune. It had previously filed for Chapter 11 in March 2009.

In these cases, stockholders get wiped out, unsecured creditors get to fight over some leftover scraps, and secured creditors get much of the company or its assets.

On Wednesday, drilling-services company Hercules Offshore announced that it had entered into a restructuring agreement with a noteholder group and expected a “prepackaged” Chapter 11 bankruptcy filing.

Boomerang Tube, which makes steel pipes for the oil and gas sector, filed last week. A number of other companies in the energy sector have filed bankruptcy so far this year, including: American Eagle Energy, Quicksilver Resources, Dune Energy, Endeavour International, Cal Dive, and BPZ Resources.

Among the bankrupt coal producers, pushed to the brink by the low price of natural gas, are Patriot Coal, also for the second time, and Xinergy.

Bankruptcy filings are also piling up outside the energy sector: a few days ago, Colt Defense filed. There was Radio Shack, Caesars Entertainment, cookware marketer EveryWare Global, auto-component manufacturer Chassix Holdings, software developer Allen Systems Group, and security firm Altegrity, which became famous for putting its stamp of approval on former NSA contractor Edward Snowden.

So far this year, 20 public companies with pre-petition assets of $150 million or higher have filed for bankruptcy, according to BankruptcyData.com.

Other companies have skipped interest payments, or are deemed to have defaulted on their debts. They have threatened their creditors with a bankruptcy filing if negotiations to restructure their debts don’t bear fruit. Among them is former rare-earths highflyer and hype-magnet Molycorp, which skipped another interest payment on Tuesday. It’s negotiating with its creditors. The way its bonds are trading, bankruptcy is next.

On Monday, Sabine Oil & Gas failed to make a $21-million coupon payment to holders of $578 million in debt that it assumed after its merger with Forest Oil. Walter Energy, with $3 billion in liabilities, may file for bankruptcy later in June if negotiations with its creditors don’t work out. Etc., etc.

And these are the good times! Interest rates are still extraordinarily low, even on junk debt, though they have ticked up a smidgen. Money is still sloshing through the system looking for a place to go. Investors still close their eyes to risk, as the Fed has bamboozled them into doing for the past six years. Oil is still trading at around $60 a barrel. Stocks are near all-time highs. There’s practically nothing on the horizon to worry about.

But there are rumblings on the horizon for the oil and gas sector. A miracle could stop them, but miracles have become rare. Read…  Biggest Glut in Recorded Crude-Oil History Taking Shape

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  1. Christer Kamb

    FED is a manager of expectations. No wonder they have put themselves in a trap. As said, it´s not about small steps, it´s about a new direction. At last FED finally knows how it feels to be japaneze!

    1. ian

      I have often wondered to what extent they should be a manager of expectations. I can see some value to a bit of unpredictability as well – if you are going to raise rates, just do it without endless future guidance.

      1. Christer Kamb

        I guess the economy has changed over the years since the 90s when financialization really took off and the FED became the “saver of first resort”(Greenspan Put…). Before they managed inflation only and they tried to keep “a bit of unpredictability” not letting the market earn a buck to easily. Since then my feeling is that capitalmarkets frontrunned by banks are leading the FED-policy. Extortion-like if you will because of what´s at stake if the banking-system fails(again). The FED is partly responsible for this mess due to their oversight-failure which goes back to insufficient market-models but also a misunderstanding how inflation/deflation works in a different structured economy.

        The FED is cornered by the fact that they feel we are in a situation like 1937 when “rates were raised to early” which resulted in a double dip-depression. Also the japanese experience is affecting their judgement. They want to be sure, really sure before action(always behind the curve) and during the “waiting-period” they are “talk the talk”-managing only. Like Japan I would not be surprised if the business-cycle turns down again before a rate-hike.

  2. Larry

    Other articles note that the principal rise in bankruptcies is firms related to energy. Reuters notes that Caesars has been a wounded beast for at least five years, so it seems unlikely that it is a harbinger of bad times to come. The same goes for Radio Shack, which failed to adapt it’s business model to the convenience of internet shopping. If the second half of 2015 continues a pace for public firms going bankrupt, I’ll be concerned. But to me it seems that at number of unhealthy firms are succumbing to reality.

    1. tegnost

      It might not be a harbinger but rather an indication that demand is lagging still, bad times continue apace. Also, Dean Baker regularly points out that amazons profits would be wiped out if they paid sales taxes, while radio shack has store fronts and employees in towns across america paying property taxes, sales taxes and employment taxes, so the using the term “unhealthy”, seems inaccurate. As the economy is so wonderful, why did the fed not raise rates?

  3. ambrit

    Heaven help me if I didn’t just read this and the phrase, “The FED that cried wolf,” popped into my mind. Planned or not, the FED Drama has carried on so long, the public seems to have become conditioned into a state of ennui. When a real black swan swims by, few will recognize it until it’s too late.
    If I were a cynic, I’d suspect that this is what’s hoped for. The “smart money” gets out early on, and the “suckers,” we know who we are, right, are left holding the bag. (Did any FED senior staffer do a graduate paper on Bernays?)

  4. Jill

    Henry Ford was a fascist who hated Jewish people. Still, he got something right. People need to earn enough money to buy your product. If they can’t, your business is going down.

    I know several local small business owners who have successfully been in business for a long time. They are now struggling to stay open. People cannot afford to patronize them as before. They are scared. These are people who have worked really hard to make their business a success. It’s not working any more.

    The ruling elite thinks its going to be fine forever. In this, they are mistaken. As they bring down the economy again (really they never stopped since 2008 and before), they apparently believe they will thrive when the vast majority of people can’t pay for housing, food, utilities, etc and get to live on a poisoned planet. Yes indeed, these are our “best and brightest”.

    1. Greenbacker

      Yet, Ford went over to Russia and proudly built infrastructure after the Bolsheviks came to power.

      Just another money changer.

    2. Noni Mausa

      “…People need to earn enough money to buy your product. If they can’t, your business is going down…”

      However, no single employer, or group of employers, can adjust their pay scale to prime the consumer pump. Not so long as there are other players, controlling effective monopolies of necessities, who stand ready to tap off whatever new cash enters the consumers bank accounts (often never leaving the bank, as the banks themselves do a lot of the tapping.) Housing, utilities, medical care, and post secondary education are examples of such sectors, standing upstream of small businesses and capturing increasing profits while downstream businesses are parched.

      In order to keep such industries from creating an economic drought, they must be controlled. In Canada, we often set up Crown Corporations, for things like electrical power production, natural gas for heating, or automobile insurance. And they work! — in my province, our power and natural gas, and our car insurance, are provided by crown corporations, with costs controlled by the Public Utilities Board, and are enviable for their good service and reasonable cost. [Example: I pay $110/mo for no-fault car insurance, which includes $3M liability, $200 deductable, and loss-of-use coverage. For electrical, I pay $7.48 per month plus 7.4 cents per KW/h.]

      And then there is our universal health coverage, which reduces patient costs by half what is spent in the USA.

      For health care alone, imagine what would happen to the US economy if every American had an additional $4,000 per year freed up to spend in their local, small business economy. ACA is a start, but you’ll be dragging the “dead horse” of the insurance industry for quite some time to come. It’s a real pity.


  5. McWatt

    I have to agree with Jill. On the local business level we still have tons of
    vacant retail storefronts. In a neighboring community their vacant store front
    problems extend to national chains leaving. If it’s not good for the big boys
    and it’s not good for the little boys then who is it good for?

    1. ian

      And yet, we continue to swallow the lies: no inflation, the economy has ‘turned the corner’, unemployment situation looking great …..
      People outside the 1% know this stuff isn’t true.

  6. susan the other

    Another catastrophe for pension funds? CDO holders might follow the MBS lead and sell everything to the Fed. So that might be a new QE. Or it might just be business as usual for the Fed that has never stopped buying this stuff.

  7. Paul Tioxon

    If there is to be a meaning transition from fossil fuels, watching the energy and energy related businesses go belly up will be watching the growth of solar power displacing crude as coal is displaced by natgas. The trend is too small to add up to much right now, but in place are all of necessary ingredients except for the scale of enterprises to take over the vast consumer base currently serviced by gas stations, quick oil changers and so on and so forth. Not only financialization with ZIRP misallocating capital to fracking companies and tar sands oil producers, the entire tight oil spectrum, but the historic conjuncture of commercial solar power producing electricity at prices competitive with coal and the pressure by the EPA to demand what will produce widespread hybrid commercial trucks, buses which will run on much less refined crude products, killing oil demand by significant percentages.

    Additionally, the US Government in conjunction with others, especially China are creating the national response to reducing burning coal and other fossil fuels and investing heavily in solar power. When China went to Pakistan recently, a large part of the $50Billion$ investment from China will go to produce more electricity for Pakistan. Among the projects announced, coal fired plants, gas fired plants, solar and wind but absent was any mention of oil. The pressure on fossil fuels is growing by the advanced economies, which now must include China in any grouping of such nations, coupled with falling prices of solar electricity, is a trend that while relatively small, is the clear future of energy. The trends are so much better than predicted for solar that not including them may give a false impression of a systemic problem, rather than a oil sector artificially propped up by low interest and huge piles of investment but no more damage outside of the tight oil group. With no where to go in the oil sector, the galloping electrical vehicle and home solar panel rooftop/battery market would be a good place to see huge piles of cheap capital properly allocated.


    1. Gio Bruno

      I’m responding to the above while parked under a parking lot canopy of solar panels (1000’s sq.ft.) that produces electric power for charging electric vehicles. (The charging outlet is free. Intended for use by college employees, it is free to all on weekends.)

      Solar PV is growing, and advancement in battery technology, appliance/lighting efficiencies, is making it ever more viable/stable. See the Eco-Home I designed in 1990 ( http://land2plan.com/solar-pv-design/ ). This energy conservation optimized home would look vastly different with the LED lighting technology, Li-ION battery bank, and refrigeration appliances of today (2015).

      My point: solar PV is making rapid advances and will soon be the energy source of choice.

    2. Ishmael

      Pass the pipe after you complete your hit!

      The drop in oil prices which is causing many of these companies to file Chapter 11 have made solar energy even more uneconomical. I have still not seen anything to refute that it takes more fossil fuel to build a solar panel then the panel will ever generate.

      Coal and gas are fossil fuels. People have been moving away from oil fired electrical plants for 30 years. Why go with a oil fired electrical plant. Of the three (oil, coal and nat gas) oil is by far the most expensive to operate.

      1. ian

        Excellent point about neglecting the energy used to make solar panels. I think about the materials used – silicon and aluminum – and they both take a lot of energy to make (especially the latter).

          1. Vatch

            I’m a day late, but Ishmael, Ian, and Moneta, you are at least partly wrong. A quick internet search found this:



            As for the subsidies, well, yes, that is an issue, especially for the petroleum industry, which has been receiving subsidies for roughly 90 years:



            1926 Congress approves the “depletion allowance,” which lets oil producers deduct more than a quarter of their gross revenues. Texas Sen. Tom Connally, who sponsored the break, later admits, “We could have taken a 5 or 10 percent figure, but we grabbed 27.5 percent because we were not only hogs but the odd figure made it appear as though it was scientifically arrived at.”

      2. Paul Tioxon

        Dear Ishhy and Ian
        You are probably used to talking to fragile flowers whom you blow them away with a meaningless tactic of changing the entire discussion about how solar panels are made with materials that are manufactured by the current built environment. And that the current built environment uses electricity powered by the existing coal and that cars and trucks are powered by the existing oil. That the little birdies are dying when they fly over solar reflective commercial power plants. This is not a morality play. The sun produces more energy that lands per square meter on the entire face of the earth than can ever be produced by the puny fossil fuel supply of earth which is so much smaller in mass than the sun, that it should not even have to be argued. The solar constant is a number that represents to total wattage from the sun that falls on a square meter of the earth. This is the new engineering eclipsing the oil geologist. And not coincidentally, the center of the energy system is the sun, not the earth with its buried fuels. We are going from a geocentric fossil fuel industry to a heliocentric powered civilization. Finally, economics will be consistent with science in at least one regard!

        Now, most people who first learned about these things, learned them over 40 years ago. From the Club of Rome to the Worldwatch Institute to Amory Lovins at the Rocky Mountain Institute, just about everyone not cashing a paycheck from an oil related company understands that all energy comes from the sun and as far as the human species is concerned on spaceship Earth, it is an infinite supply. The human race at this stage of civilization has the built physical plant in enough places on earth to create a solar based energy economy. The concept of Net Zero Architecture, buildings that produce more energy than they use to operate are being built now and have been by other labels for decades. People like you, whether a fool or a knave are simply irrelevant and do not need to be considered anymore. Your vote is not needed. Your know how or money is also pointless. No one needs to prove to you anything. The proof is operating all around the world and the dramatic drop in prices for all manner of solar electric infrastructure is continuing. For those of you who have not fallen for the cynical lies of hippie punching trolls, just set up a google news search for solar energy or PV panels or EV sales.

        Read about a leader of the solar energy movement, Dennis Hayes, here:


        One of my personal favorites is the new building in Seattle, The Bullitt Center. It is built to a higher caliber standard of excellence as a living building, that can last 250 years and use self produced energy to operate. It has 50,000 sq ft. Read about it here:


        The rest of you depressed by the moronic denouncing of anything that might produce an ounce of hope by who ever they are that show up to blurt a negative comment about how they think someone is on drugs, think they could sell me a bridge or whatever tired, lame decadent lazy troll responses they extrude from their nameless perch on the internet, they are irrelevant and have no home in the solar future. Not because it’s cool, or we should like it. It is simply coming and the worldwide investment in solar energy is growing day by day. The oil industry and its payroll of fans are dead men walking. Women too if you are oil cadre as well. It’s so obvious at this point, even the Pope is writing about it. You can google that yourself. He uses a lot of footnotes for those of you who don’t want to be sold a bridge, a pig in a poke or get hornswaggled by fast talkers.

        1. Ishmael

          Many times I have said in business meeting, “Hope is neither a good strategy or form of birth control.’

      3. Rosario

        The problem is the transition to solar not its supposed lack of net energy gain. See here https://www.youtube.com/watch?feature=player_embedded&v=t1tuzvT1hck and here http://news.stanford.edu/news/2013/april/pv-net-energy-040213.html. This has been incoming for over a decade now and the problem has always been a lack of faith on the part of the public and investors. Most photovoltaic research has been semi-fringe until about 20 years ago. There are currently 30 year to 80 percent efficiency modules on the market and when given a level playing field in terms of policy with coal, oil, and natural gas solar actually does quite well. Utilities are one of the biggest barriers but they are coming around. Solar energy is by no means a cure all but it will be absolutely essential in the coming decades.

  8. Fair Economist

    It’s the second time Saratoga has danced to this tune. It had previously filed for Chapter 11 in March 2009.

    It’s telling that an oil and gas company, after having its debts wiped clean, after going through a long period of high oil prices, and presumably run by more responsible management after the bondholders took over, managed to go bankrupt again in only 6 years.

    1. bob

      the debt doesn’t get wiped out, only re-negotiated. The equity gets wiped.

      It’s energy backed junk bonds, and the money pouring into it, especially the debt side, is huge. Not a bad bet, compared to the equity.

      They may miss some coupon payments, but the bond holder will always have a claim to the energy, which in this world, can and usually will go back up in value at some point.

    1. Yves Smith Post author

      Huh? We have super low inflation (we had negative GDP deflators in some recent quarters), the Fed is backed into a corner by its concern over asset price levels, Wolf provides data about how bankruptcies have risen to the point where investors in risky corporate credits have taken notice, and you talk about inflation?

      1. Ishmael

        That comment by Greenbacker had me scratching my head!

        As far as I can tell there is an avalanche of debt getting ready to default. A few years ago I was introduced by an intermediary to an international business that was supposedly a billionaire. To be honest since he was a SE Asian my BS meter was set to max. After several discussions and a confidentiality agreement I get to see their financials. My head started spinning. I wanted to say to they guy, “You have the most insolvent company I have ever seen and still be operating.” Oil was still in $100. I told him before we went further I needed a retainer and I needed to see his reserve report. Well our discussions went down hill from there.

        Every once and a while i look to see if they are still in business. Yup! A PE firm had a $65 million loan to him. Among the assets was a tiny refinery and all I can figure is the creditors don’t want to put the company in bankruptcy and get stuck with the clean up costs. When that company goes it will put a bunch of people out of work. Largest employer in that part of the state.

        That is deflationary!

      2. edmondo

        We have super low inflation

        I must be living in an alternate universe. I can’t even afford to consider buying beef these days. Egg prices have almost doubled in the last two months. My rent just went up 7% from last year’s lease. Housing prices are close to their all time highs in my area. Don’t even ask about those medical insurance premiums.

        If this is the “good life”, what happens when inflation kicks in?

        1. bob

          Who said it was the good life? Why is inflation always assumed to be ready to kick in?

          You do realize that you sound like the fed, right? That’s their public message, and you’re repeating it.

          Can prices go up without inflation? Or is your definition of “inflation”, simply, prices going up?

          Getting that straight is important, and not that simple.

          For instance, even according to classic supply and demand, growing demand causes prices to rise. Is that ‘inflation’?

          Or, more like we are seeing now, a supply shortage, caused by bad weather could also result in prices going up. Is that “inflation”?

          That word is abused more than most. It’s almost meaningless in conversation today. Synonymous with “going up”. Are you getting older, or inflating?

          But, use the word inflation in relation to anything with a price and you sound technical, and might just get on TV.

      3. ian

        “We have super low inflation”

        No, we don’t. Are you talking about my out of pocket medical or dental? Or college tuition that I have coming up in a couple of years? Or house prices in my neighborhood? Sorry, buy my salary hasn’t risen nearly as fast as many of the things which I have to buy.

        That “no inflation” line just isn’t believable to many of us.

        1. Yves Smith Post author

          I am sorry your costs are up, but the plural of anecdote is not data. Gas and energy prices are down. I haven’t seen increases in my what my medical providers charge to be meaningful in the two economies in which I buy dental and medical services, Manhattan and Alabama. Their occasional increases have lagged CPI increases. CPI inflation is barely above 2%, which is low by historical standards. Even allowing for the Greenspan-sposorted dorking with CPI in the 1990s, it would only be about 0.5% higher.

          To get inflation sustained enough to have meaningful inflation (and this argument started with Greenbacker contending that a reflation was going to bail out sick companies), you need labor to have meaningful bargaining power. The Fed has been in the business since Paul Volcker of tightening interest rates (and thus pushing unemployment up) and the slightest hint of meaningful wage growth.

          What you are upset about is wages lagging inflation, not inflation per se. That’s a real issue and it is longstanding, and it disproves the argument Greenbacker was putting forward.

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