By Marion Halftermeyer and Madalina Iacob
The road ahead could get worse for energy companies already struggling as a result of the massive drop in crude oil prices. Regulators are giving banks that have lent to the energy sector extra scrutiny during the annual Shared National Credit (SNC) review program that is currently underway, industry sources tell Debtwire. The greater pressure could lead those banks to pull back credit and loans available to the distraught energy companies, leaving them with little access to much needed cash.
The real litmus test will come this fall when banks will conduct their semi-annual redetermination process for borrowers of their reserve-based loans (RBL). An RBL is a form of asset based loan that is secured by the oil and gas expected to be extracted. The loan acts like a credit line and depending on how well the company is performing the bank determines a borrowing base (the revolving part); how much the company can actually access of the total. The next testing period generally comes around mid-October.
However, regulators are asking banks to reevaluate the creditworthiness of their energy credits. This could mean less leniency towards borrowers during the redetermination process, and as a result banks are likely to reduce the amount companies can borrow under its reserved based loans, in some instances, by up to 30 percent, multiple market sources say.
This would be a big blow to the business model of these companies as they depend on RBLs to provide the excessive capital needed to drill down to access oil and gas pockets beneath the surface. Some like Swift Energy, an E&P producer with operations in Louisiana and Texas, have tried, but failed, to issue additional loans to pay down $263 million in outstanding borrowings under their RBLs ahead of the fall redetermination period.
These issues arose after major banking regulatory agencies—Office of the Comptroller for the Currency, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board, through the SNC program—as part of a broader review of bank’s leveraged lending practices, started mandating tougher standards on a bank’s leverage and asset coverage for its energy loans, several sources claim.
Instead of evaluating a borrower’s risk profile and coming up with leverage metrics for the secured debt or the first lien portion that the bank has participated in, banks are being asked to take into consideration total leverage for each borrower. As a result of the pressure, banks have three choices: increase capital reserves, increase interest rates or costs of borrowing, or exit the debt, sources say.
If the banks choose to keep their energy positions, they will no doubt have to make up for the lost profitability incurred by increasing interest rates for borrowers and they may refrain from entering new energy-related loans, the sources said.
Morgan Stanley, HSBC, Credit Suisse, Societe Generale, and Natixis had a difficult time finding purchasers for the $850 million in loans they underwrote for Blackstone’s leveraged buyout of Vine Oil & Gas, an owner of gas-focused assets in the Haynesville Shale, from Royal Dutch Shell earlier this year.
The end result is Blackstone took down the entire $350 million second lien term loan C portion of the deal. The $500 million first lien TLB was sold in the secondary market and currently trades in the high 80s, according to Markit.
Marion Halftermeyer is a reporter following the energy space for Debtwire Middle Market. She can be reached at Marion.Halftermeyer@debtwire.com. Madalina Iacob is a senior reporter covering the energy beat for Debtwire North America. She can be reached at Madalina.Iacob@debtwire.com.
