OREANDA-NEWS. Energy defaults are mushrooming amid oversupply and improved, but still-weak commodity pricing, underscored by today's pre-arranged Chapter 11 bankruptcy filing by SandRidge Energy, Inc., according to Fitch Ratings.

The SandRidge filing adds a relatively sizable $3.6 billion of default volume to the Fitch High Yield Bond Default Index's Energy sector total. The filing pushes the total trailing 12-month (TTM) energy sector default rate to 14%. Energy company default volumes have ballooned to $26 billion year to date compared with $17.5 billion for all of 2015. Fitch expects additional oil and gas bankruptcy filings this year and forecasts a 20% energy sector rate by year end.

SandRidge marks the fourth notable energy company to file for bankruptcy protection during the past week. Linn Energy and Penn Virginia filed last Wednesday and Thursday, respectively, while Breitburn Energy filed late last night. The May TTM E&P default rate is now approaching 27%, with Fitch forecasting a 30%-35% rate for year-end 2016. Sandridge is the third-largest energy bankruptcy behind Linn Energy and Samson Resources in the current downturn.

SandRidge's debt consists of first lien asset based loan (ABL) borrowings, $1.3 billion of 8.75% second lien secured notes due 2020, $2. 2 billion of senior unsecured notes in four separate series and $53 million of convertible notes. A majority of holders at each debt level signed a restructuring support agreement (RSA) that lays out the proposed debt to equity swap and new capital structure in the reorganization plan.

The rapidity of value erosion of SandRidge's $1.3 billion second lien notes is notable. The notes were originally issued in June 2015 at par during a temporary improvement in oil prices that facilitated an upsizing of the junior secured issuance from $1 billion during the marketing period. Declines in commodity prices then resumed, which quickly dragged down asset values and recovery prospects of SandRidge's second lien debt. The second lien was bid at $0.33875 as of May 13, 2016. Under the RSA, the second lien note claims would receive $300 million of convertible debt and 85% of the new common stock.

The unsecured notes were bid at approximately $0.05, indicating very poor recovery expectations. The RSA proposes distributions to unsecured claims of $10 million plus 15% of the new common stock.

SandRidge's use of debt to fund expansion efforts in the midcontinent left it with high leverage. The company made several efforts to enhance liquidity and reduce debt prior to filing including: repurchasing unsecured debt at a deep discount, slashing capex, selling assets and amending ABL covenants.

SandRidge drew down the remaining $488.9 million of availability per the maximum borrowing base limit under its $500 million as ABL has become more common for distressed E&P companies prior to bankruptcy. The Jan. 22, 2016 draw boosted the cash balance to $855 million and improved liquidity going into the restructuring negotiation process. The company repaid $40 million of ABL borrowings just prior to filing. Per the RSA, ABL lenders claims would receive plan distributions in the form of a new $425 million first lien exit facility and $35 million of cash. Sandridge has no plans to seek a DIP facility.