Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Some commodity companies have an emergency valve they can pull as the doors to the debt markets rapidly close on them. They can simply borrow on revolving credit lines provided by big Wall Street banks and use that to pay off debt. But that maneuver is about to get tested.

Earlier this month, Brazilian mining company Vale drew $3 billion of its $5 billion revolving credit facility to repay $1 billion of maturing bonds, according to Bloomberg Intelligence analyst Richard Bourke. And Kinder Morgan may do the same as it faces about $750 million of maturing debt, Barclays analysts Harry Mateer and Greggory Price said in a note Wednesday. This will be the first year the analysts can recall that the energy company won't issue bonds, they noted.

Not So Kind
Kinder Morgan's shares have plunged in tandem with falling energy prices.
Source: Bloomberg

On an earnings call Wednesday, Rich Kinder, the company's chairman, said that the market was the toughest he's ever seen and that fundamentals didn't seem to matter in energy markets. He said he was seeing "chicken-little, sky-is-falling'' market conditions. The company, North America's biggest oil pipeline operator, posted a net loss of $611 million in the fourth quarter amid the worst energy market collapse since the 1980s.

Indeed, no speculative-grade energy companies have sold dollar-denominated bonds this year,  and only about five investment-grade energy corporations have managed to sell U.S. bonds, data compiled by Bloomberg show. A growing number of speculative-grade energy companies are engaging in distressed-debt exchanges, although that comes with risks as well.

For example, Cliffs Natural Resources forked over almost $70 million of cash to buy back some of its bonds at 55 cents on the dollar last year only to have those bonds plummet to 18 cents. In other words, they wasted their dwindling free cash on what essentially proved to be a bad deal.

Off a Cliff
Cliffs Natural Resources' 3.95% bonds have plunged since its distressed-debt exchange.
Source: Bloomberg, Finra Tracce

Other companies are trying to secure loans from brave distressed debt investors, although those investors will demand nosebleed-high premiums.

In comparison, drawing down on an existing credit line seems like a good option for companies

Of course, ripple effects emerge from this. First, such a move perpetuates leverage that was built into the energy market at a time when oil prices were three times as high as they are now. Companies would essentially be leaning on big financial firms to support them until either debt markets reopen to them or oil prices rebound, neither of which is guaranteed to happen anytime soon.

Second, there's a question of what happens to the big Wall Street banks that are already girding for energy-loan related losses. Four of the biggest U.S. banks, Bank of America, Wells Fargo, Citigroup and JPMorgan Chase, have set aside more than $2.5 billion combined to cover souring energy loans, according to Bloomberg News's Asjylyn Loder.

If energy companies start drawing down on credit lines, banks will have to determine whether the debt is secured, how much the underlying assets may now be worth and how much in additional capital they may have to put aside to offset the increasing risk.

Wall Street banks have so far reiterated their commitment to their corporate clients, who've padded their balance sheets over the past seven years with lucrative debt underwriting fees.

"We continue to support clients while managing lending limits and actively engaging with stressed borrowers," Bank of America's Chief Financial Officer Paul Donofrio said this week in a call with analysts.

Those clients, especially the ones in the energy sector, may soon test that commitment as they seek shelter from the credit storm.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net