Funding the shift: navigating high-yield markets in natural resources

December 2026 | SPOTLIGHT | FINANCE & INVESTMENT

Financier Worldwide Magazine

December 2026 Issue

Few corners of the debt capital markets are as strategically important, or as frequently misunderstood, as natural resources. The businesses that extract hydrocarbons and metals underpin industrial output and will supply much of the material the energy transition needs. These industries often present a unique blend of financing challenges, including the commitment of large sums in anticipation of future revenues. Most natural resources issuers hold a mix of producing and development assets, so investors are asked to look to both cash flow today and growth tomorrow within the same group. Additionally, the underlying risk for investment and lending is not merely a credit judgement, it necessarily must include a view on commodity prices, which drive both the value of reserves and the cash available to service debt, and broader macropolitical environments encountered across jurisdictions where these assets are typically located, which means that treating risk allocation, security and financing flexibility is often only part of the analysis.

Lenders and bondholders therefore need to look beyond headline leverage, coverage ratios and ratings to the assets beneath the credit, their cost position, their distance from cash generation, where they sit and how the debt is structured around them. That applies as much to corporate debt serviced from group cash flows as to project-level financing. As producers grow through acquisition and spend on new capacity, infrastructure and critical minerals, bonds, secured facilities and project debt increasingly sit side by side in the same capital structure. The high-yield market is central to getting that mix right. It is a core funding source for US natural resources issuers but remains marginal in Europe. According to 9fin data, oil & gas accounted for roughly 11.6 percent of US high-yield issuance in 2024, against around 1.4 percent in Europe. Closing that gap is a matter of analysis, not appetite.

Understanding the natural resources value chain

The energy sector is divided into upstream, midstream and downstream businesses, each with distinct funding needs and risks.

Upstream companies find and produce the oil or gas. Here the line between assets still in development and assets already producing is decisive. A promising undeveloped discovery may be valuable on paper yet service no debt today, whereas a mature producer has reserves, a track record and testable cash flow.

Midstream companies move, process and store what upstream produces. Because much of their income is fixed by long-dated contracts, often on a take-or-pay or capacity basis, their credit can resemble infrastructure, provided volumes hold up, customers pay and the assets perform. Downstream earnings follow processing spreads and run-rates more than commodity prices.

Among 2024 US oil & gas high-yield issuers, producer Magnolia Oil & Gas reported net leverage of 0.1x, while midstream names Summit Midstream Partners and Tallgrass Energy were at 5.2x and 7.3x, multiples that contracted revenue helps to sustain. Position in the value chain therefore shapes how much leverage a credit can bear.

Corporate financing versus asset-level financing

The first structural question is whether investors are looking to a specific asset or to the group as a whole. Group-level debt rests on the issuer’s overall credit and on whatever guarantees its subsidiaries provide. Bondholders, however, must read the whole balance sheet. If the most valuable assets are held by subsidiaries that have not guaranteed the notes, lenders to those subsidiaries will be paid first from them.

Unsecured senior notes remain the norm, but security is often required of more concentrated or more leveraged credits. In 2024, nine US oil & gas high-yield tranches, worth approximately $3.7bn, were senior secured or second-lien, among them Talos Energy’s $1.25bn of second-lien notes and Karoon Energy’s second-lien notes with a 10.5 percent coupon.

Asset-level structures start elsewhere. A reserve-based facility sizes borrowing on the expected cash flows of eligible reserves. Project finance goes further, placing the asset in a dedicated vehicle and looking to its contracts and cash generation for repayment, which can suit a liquefaction plant, floating production, storage and offloading (FPSO) or similar large, contracted vessel.

The distinction is fundamental. A corporate bondholder lends against the cash flows of the whole group, spread across several assets and supported by the issuer’s ability to refinance; if one asset falters, others can carry the debt. A project lender lends against a single ringfenced asset, typically with limited or no recourse to the sponsor, and so requires security over the asset and the vehicle’s shares, controlled cash waterfalls, reserve accounts and closer oversight than a high-yield indenture provides.

Project bonds sit between the two – issued into the capital markets but repaid from project cash flows. They are most often used to refinance an asset once built, because bonds are funded in full at closing, creating negative carry, and a dispersed bondholder base is slow to grant the consents construction often requires. These tools are complementary, and one company may use all three.

Development-stage assets versus established businesses

Before first production, exploration, permitting and construction consume cash, and overruns add to the bill. A conventional high-yield bond requires coupons to be paid whether the project is producing or not, so early-stage developers typically lean on sponsor equity, development finance institutions, prepayments or project loans. Moody’s research on project finance bank loans finds that default risk generally falls once construction is complete, with average recoveries of 70.9 percent on construction-phase defaults against 79.5 percent in operation. It is at this point that a high-yield or project bond refinancing typically becomes realistic.

A producing business can point to its operating history and cash generation. Most issuers, however, sit between the two, using cash flow from producing fields or mines to fund development elsewhere in the portfolio. For corporate lenders, that blend is both a strength and a risk, as producing assets support debt service and diversify exposure, but development spending can compete for the same cash and can stretch the balance sheet if prices fall. Covenants, restricted group design and capital expenditure flexibility determine how far group cash can be diverted to growth.

Commodity exposure can compound investment decisions. An investor in a natural resources company is taking a view not only on the company’s creditworthiness but on the price of oil, gas or metals over the life of the debt. Hedging programmes, price-linked borrowing bases, offtake terms and cost position all shape how much of that risk sits with lenders or investors.

Jurisdictional differences

Natural resources portfolios rarely sit in one country. A single issuer may hold licences in the North Sea, West Africa and Latin America, each with its own fiscal regime, state participation, licensing terms and political risk. These differences affect what lenders can rely on, whether security over licences or production can be taken and enforced, whether host government consent is needed for a change of control or transfer, whether cash can be repatriated freely and how insolvency regimes treat secured creditors. Allocation of risk between the state, the operator, partners and lenders vary by asset, and a group’s financing structure must accommodate that variation, for example by excluding higher-risk subsidiaries from the restricted group or financing them separately at asset level.

Why natural resources companies access the high-yield market

Many natural resources companies need large amounts of capital and are rated below investment grade. For them, high-yield bonds provide longer-dated funding than banks typically offer, on lighter, incurrence-based covenants, without equity dilution. They also fill a structural gap. Many project bond buyers can hold only investment-grade paper, which construction risk makes hard to reach, so sub-investment-grade assets funded by banks or sponsors through construction are often refinanced in the high-yield market once operating.

The scale differs sharply by region. US oil & gas issuers raised approximately $31.7bn across 51 tranches in 2024 and $21.9bn across 34 in 2025, roughly 11.6 and 7.3 percent of US high-yield issuance. European oil & gas issuance was approximately €1.9bn and €3.4bn, around 1.4 and 2.5 percent of the market respectively.

Refinancing is the dominant use of proceeds, with acquisitions close behind. In 2024, 47 of the 51 US oil & gas tranches included refinancing among their stated purposes, and 19, worth approximately $14.1bn, included acquisitions, Occidental Petroleum’s $5bn deal among them.

Market access is never guaranteed, rising and falling with investor appetite, rates and commodity prices. Coupons on 2024 US oil & gas tranches ranged from 5 percent to 12.5 percent.

Copper, lithium and the changing investment landscape

Decarbonisation is changing what gets financed. Electrification needs copper, and batteries need lithium, nickel, graphite and cobalt. Long-run demand does not protect producers from short-run price falls. Lithium has shown how quickly new supply can overwhelm the market, and copper mines can take many years and very large budgets to bring into production.

Mining remains a small part of the high-yield market. Steel and mining accounted for around 1.2 percent and 1.5 percent of US high-yield issuance in 2024 and 2025, against 0.4 and 1.0 percent in Europe, with 2025 US issuers including Commercial Metals Company, which raised $2bn, and First Quantum Minerals. Much critical-minerals funding therefore still sits in equity and project debt until assets are producing. Owning a critical mineral is not itself a credit strength. Cost position and resilience to macro and political changes are fundamental investment considerations.

FPSOs: combining asset finance and corporate debt

FPSO vessels show clearly how asset-level debt and corporate debt can coexist. Each vessel requires heavy investment years before it earns anything, so financing must deal with construction, schedule, budget and performance risk.

Typically, a special-purpose owner borrows on a secured basis against the vessel and repays from the charter hire paid by the field operator, so the contractor’s credit turns more on the charter and the operator’s strength than on the oil price. An established contractor may also issue high-yield bonds at the holding-company level, so investors need to understand which entity owes what, whether vessel cash can reach the parent and how secured lenders rank.

Conclusion

Financing the sector well means keeping several distinctions in view: between development and producing assets, often within the same portfolio, between group-level obligations serviced from corporate cash flows and asset-level debt, between credit risk and commodity risk, between jurisdictions with very different approaches to risk allocation, and between tomorrow’s demand story and today’s ability to service debt. Bonds, corporate facilities and project finance will keep playing complementary roles. For the high-yield market, particularly in Europe, the opportunity is to analyse these credits on their merits rather than leave them to bank, project and equity capital alone.

Noel Hughes is a partner and Apollonia Persianis is an associate at Skadden, Arps, Slate, Meagher & Flom (UK) LLP. Mr Hughes can be contacted on +44 (0)20 7519 7600 or by email: noel.hughes@skadden.com. Ms Persianis can be contacted on +44 (0)20 7519 7000 or by email: apollonia.persianis@skadden.com.

Noel Hughes and Apollonia Persianis

Skadden, Arps, Slate, Meagher & Flom (UK) LLP