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Commodities Junk Faces More Pain Amid Contagion Threat, UBS Says

By Aleksandra Gjorgievska, Bloomberg January 27, 2016

A prolonged slump in oil prices promises more pain for commodities-related debt and threatens to spread to other parts of the leveraged-finance market, according to UBS Group AG.

Energy bonds have borne the brunt of crude’s plunge to a 12-year low, falling 10 percent this year after a 24 percent drop last year. With no end in sight to the oil slump, the market may not be adequately pricing in defaults or compensating investors for mark-to-market and liquidity risks for lower-rated junk companies, UBS strategists led by Matthew Mish wrote in a note Wednesday.

"Given the significant widening in commodity spreads, is it the case that the market has largely priced in the risk? Not necessarily," Mish said in a phone interview. "The linkage between commodity spreads and the underlying physical commodity is still very strong. Lower oil will trigger more stress and wider spreads."

 

The premium investors demand to hold junk energy bonds widened to a record 19.3 percent this month, compared with a five-year average of 7.6 percent, Bank of America Merrill Lynch indexes show.

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