Goldman Prepares To Turn Bearish On Oil Again; Boosts 2016 Bond Default Target By 25%
By Tyler Durden
Not content with releasing one bearish note per day, Goldman has upped the ante to two (or more).
Following yesterday’s scathing attack on the ECB by Deutsche Bank, Goldman felt the urge to chime in as well parallel to the German bank’s accusations that Goldman’s former employee, Mario Draghi is set to destroy the Eurozone with his monetary lunacy, and in a note by Huw Pill, Goldman said that “as the ECB shifts from a passive, intermediation-driven form of balance sheet expansion towards a more pro-active QE-driven policy, concerns about the impact on financial stability will inevitably and rightly rise.“
Of course, Goldman couldn’t completely run over its former managing director – just imagine the Goldman-related “discovery” that a criminal probe would reveal – and so it tried to mitigate its sharp assessment, saying “yet the ultimate objective of these ‘active’ central bank balance sheet policies is to revive aggregate demand and boost nominal growth. If successful, the beneficial effects of the macroeconomic improvement on financial stability would more than outweigh the short-run and partial implications coming from incentivising greater risk-taking.”
Right. The only problem is that 8 years later, there has been no boost in aggregate demand, in fact just the opposite, not to mention a total collapse in DB stock as a result of NIRP crushing the NIM carry trade, which is why so many banks and pension funds are now furious at the ECB.
However, it wasn’t just the ECB that Goldman took issues with. In a separate note by Goldman’s HY analysts, the firm announced that it has boost its 2016 default forecast by nearly a quarter, from 17% to 21%, and now expects a substantially greater amount of debt – mostly high yield – to default this year.
Here is Goldman’s math:
After a quiet Jan/Feb, E&P bankruptcies picked up steam in late 1Q ahead of spring borrowing base redeterminations. By our math, about $30bn of par value debt has defaulted in the HY E&P space YTD, representing about a 17% default rate.
On the back of our bottom up analysis we are now raising our full year default forecast to 21% from 17% previously. Note that our numbers exclude many smaller producers without tradable debt. Including this cohort would boost total defaulted E&P debt in 2016 to about $35bn based on our analysis.
One driver of defaults exceeding our forecast in 2016 has been companies preemptively filing prior to a real liquidity crunch. As shown in the chart in the body of this report, a number of E&Ps have recently filed with substantial cash balances. Notably Linn Energy (NC) filed with $1,060mm of cash (11% of total debt balance), SandRidge with $694mm (19%) and Midstates Petroleum with $301mm (15%).
Normally, there would be a silver lining to all these bankruptcies – the one Saudi Arabia has been gunning for all along, namely the collapse in high-cost oil production. Only in this case, the wave of default, while substantial, will hardly put a dent on …read more
Source: Goldman Prepares To Turn Bearish On Oil Again; Boosts 2016 Bond Default Target By 25%
