Energy Credit Lines Face 35%-40% Cuts, Turnaround Lawyer Says

Banks that lend money to energy companies are likely to slash credit lines as much as 40 percent when they reassess how much will be available to struggling North American producers this month, according to a lawyer who specializes in petroleum-industry turnarounds.

“Based on the numbers that we’ve seen, we anticipate borrowing bases will decline between 35 and 40 percent,” Michael Cuda, a partner at Squire Patton Boggs US LLP, told restructuring professionals at a conference in Scottsdale, Arizona. “The companies that are actually utilizing their borrowing base are going to be impacted substantially.”

Banks are in the middle of their semiannual reviews of oil and gas loans, with many drillers facing reductions of the amounts they can borrow. The October redetermination comes as Moody’s Investors Service warns that the second round of credit line cuts this year could cause some producers to be unable to meet financial covenants imposed by their lenders, according to a report from the ratings company.

The oil producers whose credit lines are most severely sliced would not only lose access to future borrowings, they also would be “kicked into a repayment provision” forcing them to “repay part of the borrowing base,” Cuda said. Companies that don’t use borrowing bases won’t be affected, he told investors and turnaround specialists at the Turnaround Management Association’s annual conference.

Higher Rates

In addition to being able to borrow less, Cuda said he expects some banks to begin charging energy producers higher interest rates for the temporary loans.

Other potential lenders to energy companies such as private-equity firms and distressed-debt investors are waiting to provide rescue financing and investments, according to Cuda, who represents lenders in addition to companies.

“They’re sitting on the sidelines saying, ‘These assets are going to get real cheap, real fast,’” Cuda said.