Wary Energy Bankers Trying to Sell Loans Backed by Oil Reserves

  • Reserves-backed loans trading hands amid regulatory pressure
  • Some lenders selling RBLs at steep discounts: Haynes & Boone

Banks are trying to unload loans once thought to be the safest form of energy credit.

Debt backed by oil and gas reserves are being offered at discounts as increased scrutiny by regulators and investors has forced lenders to set aside more cash to cover losses, the law firm Haynes & Boone LLP said in a note to be delivered to clients Monday. Some banks that bought slices of syndicated loans may try to sell their entire portfolio, according to the note.

Reserves-based lending was long considered safe because banks historically got back every penny they lent, even after default, according to a 2013 Standard & Poor’s report. Moody’s Investors Service Inc. said in an April 7 report that lenders could lose 21 cents on the dollar on defaulted exploration and production loans, four times more than the historical average.

“The fact that these loans are selling at a discount was not part of the plan," Buddy Clark, a partner at Haynes & Boone in Houston, said in an interview. “The RBLs don’t usually trade hands all that often. Back in the good days, the lead bank or agent bank would just buy the smaller lenders out at par. But now we have banks trying to get out at a loss."

The four largest U.S. energy banks -- Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. -- have almost $190 billion in industry exposure, including funded loans and future commitments to lend, according to data compiled by Bloomberg from first-quarter results.

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