KUALA LUMPUR: The plunge in oil prices since the second half of 2014 has serious implications for bondholders in the oil and gas (O&G) sector, according to Moody’s Investors Service.

In a report last Thursday, Moody’s said as prices fell and companies’ credit positions became more precarious, their financing was most likely to take a form that could raise subordination risk for their bondholders.

According to Moody’s vice-president and head of Covenant Research Alexander Hill, oil companies require a high level of ongoing investment in exploration and development to maintain their asset base, much of which has been funded by debt.

“Amid falling O&G prices, financing of the oil companies is most likely to take the form of second-lien debt secured by collateral of diminished value and that ranks senior to liens held by their bondholders,” he said.

Moody’s report on “Plunge in oil prices raises risk of liens subordination in oil and gas bonds” said the flexible structure of many O&G bonds added to their liens subordination risk.

It said this appeared most frequently in the midstream and propane subsectors, which affected 86.7% and 85.7% of bonds, respectively, and least often in the oilfield services and refining and marketing subsectors, whose percentages were both below the North American average for all bonds.

Hill said the midstream and propane subsectors offered the poorest protection against liens subordination.

This article first appeared in The Edge Financial Daily, on January 13, 2015.