Credit
Energy Infrastructure Investing: What are the energy debt markets telling us?
Podcast
Jun 16, 2025
Listen to Brookfield's energy infrastructure portfolio managers, Boran Buturovic and Joe Herman, discuss what is happening in energy credit markets with Dan Parker, co-portfolio manager of Brookfield's High Yield Strategy. Dan provides background on the energy sector within the high-yield and investment-grade credit universe, discussing how recent market volatility has impacted the cost of borrowing for energy companies. He also discusses long-term valuations and the ability for energy companies to raise capital in today's environment.
Boran Buturovic: I'm Boran Buturovic, I'm joined by my co-portfolio manager, Joe Herman. We are also thrilled today to have Dan Parker, a portfolio manager on the global credit team as a guest, and we are privileged as part of Brookfield’s Public Securities Group to collaborate with and work alongside a team that invests in bond markets. So Dan, thank you for being here today.
Could you please provide our investors with an analysis of what you are seeing in energy credit markets?
Dan Parker: Sure, thanks guys – long time listener, so it’s fantastic to be invited onto the show. So, maybe for the benefit of your listeners, I’ll just give a quick overview of energy in the credit market. In the High Yield space, energy accounts for about 11% of the index. That’s down from a few years ago, it was up over 50%. That reflects the improving balance sheets, energy companies really took it upon themselves to decrease leverage coming out of the COVID crisis. It has shrunk a little bit in the index but it’s still a really important part of the High Yield index.
On the IG side, it accounts for about 8.5% of the investment grade universe, so energy is a really important sector in credit markets and we've seen obviously, as you guys just touched on, a lot of volatility. So, we did see when the tariff announcement happened in early April, we saw spreads move out immediately quite a bit wider.
And so just to just to translate that a little bit for those of you that aren't familiar with credit, spreads would be the risk premium over the Treasury, which is how we talk about whether bonds are expensive or not. So we saw spreads move out immediately. They really did gap quite significantly. They have since retreated. So on the high yield side, we had spreads that were, you know, sub 250 in energy and we saw them shoot up to 475. So, that was a pretty big jump over two percentage points. They have retreated, so we're back now in the 430 range in high yield.
So this is interesting because there also has been a lot of volatility in the Treasury market. And so the coupon on a bond or the yield is made-up of both the spread and the Treasury. And because treasury rates are down, the overall impact on yields isn't as big as what we've seen in spreads. So, all to sum up, for high yield companies, the cost of borrowing has increased, we would say probably half a percentage point to maybe 3/4 of a percentage point in high yield.
Interestingly, in investment grade, which a lot of the companies that you invest in with better balance sheets, better credits, their borrowing cost is actually a little bit lower than we were at the start of the year because the move in spreads has been less than the move in Treasuries. So, overall we're not seeing a huge impact yet for energy companies in terms of the cost of borrowing. It's not great, obviously yields have moved higher, but not so much that we think it's a major impact for energy companies yet. So, I think that's the good news.
I think just a couple of points to touch on though. Energy had traded very expensive relative to other credit coming into the tariff shock and we've now seen that energy does trade a little bit wide of the benchmark. So, there has been a reappraisal by credit investors that energy you know, is more vulnerable here with the potential recession and some of the geopolitical news. But overall, I would say it's not too bad.
I think the other point to mention here, and this is really critical for high yield companies, is credit markets are open. We saw two new deals in April, which tells you that companies can't access the market, they can't access credit. So, I think how we look at it, things are obviously not as good as they were six months ago, but overall, the market has hung in there. From a longer-term valuation perspective, credit is not cheap. We're more in the long-term, closer to the long-term averages. So, I would say there's some warning signals, but nothing too material yet.
Joe Herman: Thanks Dan, you know, obviously as being part of Brookfield, we get this insight pretty frequently, but I don't think our investors have the opportunity to hear bite size content on the credit markets like this. So, thanks for stepping in and providing that insight for our investors. We can chat and do another one of these again soon.
Best of luck to everybody as we navigate this period of volatility and uncertainty, and we look forward to providing more hopefully relevant kind of bite sized content like this for everybody again soon.
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