Oil Rout Has Banks Reining in Risky Loans, Adding to Energy Woesby and
With crude trading near its lowest level since 2003, banks large and small are clamping down further on how much they’re willing to lend to risky oil-and-gas companies.
Standard & Poor’s estimates that credit lines to these companies -- the amount banks are willing to lend based on the value of the firms’ reserves -- could be cut by 30 percent the next time banks conduct their twice-yearly reevaluations in April. That’s even after a reduction of about 10 percent in November, according to Thomas Watters, managing director of the credit rater’s oil and gas group.
Banks including Wells Fargo & Co., Goldman Sachs Group Inc., Bank of America Corp. and JPMorgan Chase & Co. and regional banks such as Comerica Inc. and SunTrust Banks Inc. have all voiced caution about the sector as increasing numbers of energy companies file for bankruptcy.
“The pressure on lenders to reduce the borrowing base during spring or discretionary redeterminations increases,” said David Karp, a distressed-investing attorney at Schulte Roth & Zabel LLP. “A few more months in this commodity pricing environment will result in a substantial increase in the number of restructurings and Chapter 11 filings.”
Already, Wells Fargo lost $118 million on oil and natural gas loans in the fourth quarter and Citigroup Inc. added $250 million to its reserves to cover potential losses in its energy portfolio as oil fell from $90 to about $30 a barrel in the space of 15 months. Oil-and-gas securities accounted for 31 percent of the total amount of debt trading at a distressed level in January, according to a Standard & Poor’s report. Debt is considered distressed when it trades with yields of more than 10 percentage points above Treasuries.
Goldman Sachs Chief Financial Officer Harvey Schwartz said on a Jan. 20 earnings call that the bank was avoiding the riskiest end of the oil-and-gas industry. The lender has slashed its exposure to non-investment-grade securities in the sector to 15 percent from 47 percent a year ago. Its total exposure is down from $10.9 billion to $10 billion over the same period.
Bank credit and capital markets “were quite open” for energy companies last year “and that has gone away” in 2016, Wells Fargo’s chief financial officer John Shrewsberry said on a Jan. 15 conference call. The bank held as much as $17 billion in energy loans as of Jan. 15, most of which is non-investment grade, he said.
Regional banks, which have been struggling to remain compliant with tighter lending rules due to their large holdings in the energy sector, “have only recently begun to really pull back from a willingness to provide credit,” Shrewsberry said. “Maybe it’s this incremental leg down to where we are in crude prices that have people generally believing that this is where we are for a longer time,” he said.
SunTrust Banks, which serves regions including Florida, Georgia and Maryland, is feeling pressure from “the prolonged low oil price environment.”
“Remember, we set these reserves when oil was $37, and if oil moves into the $20s, we’ll have to take account,” financial chief Aleem Gillani warned investors in a Jan. 22 earnings call.
“The move has been very, very rapid. And we’re just trying to make sure that we try and stay ahead of this so that we don’t end up surprising you and ourselves later,” said Gillani.
The sentiment was echoed by Associated Banc-Corp, which serves the Midwest. “I’m not going to sugarcoat it,” president Philip Flynn said on a Jan. 21 call. “It’s a tough environment.” He said that investors should “expect to see a lot of defaults start to pop up as people fall out of conformance with their borrowing bases.”