AllianceBernstein Becoming Energy Banker as Wall Street Retreats

  • Asset manager building a team to focus on energy sector
  • "A core financing need that banks are unable to fulfill"

As the biggest banks pull back from lending to troubled energy companies, AllianceBernstein LP is stepping in.

The $460 billion asset manager is building up a team in its fixed-income business that invests in oil and gas companies. It will make loans, buy bonds, and take equity stakes. The company has hired Daniel Posner, a veteran distressed-debt money manager, to lead the team along with Petter Stensland, a high-yield credit analyst at the firm. 

"Capital is truly dear and the sector has gone much further through a challenging environment," said Ashish Shah, head of fixed income at AB. "There is a core financing need that banks are unable to fulfill and we think we can provide that capital solution."

Energy companies are starved for credit after the price of oil fell by more than 60 percent since the middle of 2014. Regulators are pressing banks to cut their exposure to risky junk-rated loans and bonds, which has made it harder for energy companies to borrow. That situation could get worse in April after banks conduct their twice-yearly reevaluations of their oil and gas loan exposure, a review that could reduce credit lines by 30 percent, Standard & Poor’s estimated earlier this month.  

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The banks’ retreat, combined with a jump in oil prices in recent weeks, has enticed at least some investors to increase their exposure to energy companies. AB’s credit team is the latest example of the "shadow banking system" ramping up while traditional bank lenders pull back.
 
The U.S. shale boom earlier this decade was fueled by junk debt. Companies spent more on drilling than they earned selling oil and gas, plugging the difference with bonds and loans. 

Those loans and bonds are now a millstone for many banks and other lenders, a turn that regulators are paying close attention to. According to a report from bank examiners including the Federal Reserve in November, credits related to energy companies were increasingly weak. 

From the beginning of 2015 through March 7 of this year, 51 North American oil and gas producers filed for bankruptcy, according to a report from law firm Haynes and Boone. A number of energy companies, including Energy XXI Ltd. and Goodrich Petroleum Corp., have delayed debt payments in recent weeks, triggering a countdown to default. 

Banks including Wells Fargo & Co., Bank of America Corp. and JPMorgan Chase & Co. have all voiced concern about oil and gas loans as a growing number of energy companies deteriorate. Those worries are translating to less access to credit for borrowers in the industry -- Whiting Petroleum Corp said on Monday that its lenders had cut back its line of credit, for example.

It is not clear when large numbers of shadow banking lenders will increase the flow of credit to energy companies. Ever since oil prices started plunging, investors have been talking about potential bargains in the industry. Private equity firms have raised more than $20 billion for oil and gas deals in the last two years, but that money has largely remained on the sidelines.

At a conference earlier this month, Bennett Goodman, the head of Blackstone Group LP’s credit arm GSO Capital Partners, said that he expects there will be a number of good investments to make in the industry, eventually.

“We haven’t yet found a lot of opportunity,” he said. GSO has 20 dealmakers devoted to energy. 

Rallying Oil

Posner joins AllianceBernstein from Golub Capital, where he was running a distressed-debt fund that the firm shut down earlier this year, citing difficulties in navigating market illiquidity. Before that he ran the distressed-credit unit at D.E. Shaw & Co. "You need a platform that has a longer-term view to the asset class," Posner said. "And right now is a good entry point into energy."

Investors’ appetite for risk may have begun increasing. In recent weeks, oil prices have jumped more than 45 percent, helping to drive junk bond prices higher and erase the losses that high-yield debt had turned in for 2016. Those gains have encouraged many fund managers like Pacific Investment Management Co. to start buying debt in the industry again. Energy junk bonds have rallied 16 percent this month, their best ever monthly performance, Bank of America Merrill Lynch data show.

"There’s more of a view that the bottom is in," said Dan Pickering, chief investment officer of Tudor, Pickering, Holt & Co., an investment and merchant bank focusing on energy. 

"You are seeing funds positioning themselves to deploy more capital and preparing their investor base for a capital call," Pickering said. "They are looking to step in and provide capital in a space where banks would have historically lent."

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