Oil Patch Taps Funds for Credit as Canada’s Banks Pull Back

  • Aimco, Stream, Magnetar step in amid shrinking borrowing bases
  • Benefiting from ‘market misery’ as commodities rout drags on

Canadian oil and natural gas companies are signing up new lenders as banks pull back amid a prolonged commodities slump.

Among the investors to step up in recent months to provide financing to the industry: Alberta Investment Management Corp., the provincial pension fund manager known as Aimco; Stream Asset Financial Management LP, a private-equity firm; and hedge fund Magnetar Capital LLC.

Fund managers are finding a sweet spot in small and midsize companies considered under-valued and high quality by investors, but which are seeing their bank lines cut and have found the bond market closed to them.

“Those that can take advantage of the market misery have historically done very well,” David Tiley, portfolio manager at Edmonton-based Aimco, said in a phone interview. “It’s clear that there’s a secular intent by the big banks to retrench.”

Two years into the downturn, many executives in the energy hub of Calgary spent the summer selling assets, raising equity and scouring for sources of funding amid a broad bank pullback. Lending syndicates shrank credit available under revolving facilities by about C$1.7 billion ($1.3 billion) or 32 percent, across 20 small and midsize Canadian producers at the end of spring reviews, according to data compiled by Bloomberg. Attention is already turning to the next round of reviews this fall.

“Companies are all walking a precarious tight rope,” said Rafi Tahmazian, partner and senior portfolio manager in Calgary at Canoe Financial LP, which manages about C$3.5 billion. “The banks in bad times are always the first ones to panic and bail.”

U.S. crude prices traded at $46.72 per barrel at 2:18 p.m. in New York, up 78 percent since a February low but still off more than half from a mid-2014 peak.

It’s too early to say how borrowing-base redeterminations will go in the fall. If commodity prices remain stable, there may not be a big change in revolving credit facilities for oil and gas companies, Bank of Montreal Chief Financial Officer Tom Flynn said Tuesday in a phone interview.

“We’re working through the impact of the lower commodity prices on the sector,” Flynn said after the bank reported its earnings. “It’s happening, from our perspective, in a very orderly way.”

‘Ripple Effect’

Aimco committed C$200 million to Calfrac Well Services Ltd. in June, made up of a second-lien senior secured term loan bearing annual interest of 9 percent, as well as stock purchase warrants, according to a statement. The pressure-pumper said it would repay bank debt with the proceeds and could also buy back some of its unsecured notes due in 2020. Chief Executive Officer Fernando Aguilar didn’t return a request for additional comment.

Gas producer Pine Cliff Energy Ltd. benefited from a C$30 million Aimco term loan investment this month, made up of promissory notes bearing annual interest of 6.75 percent and stock purchase warrants. That was in addition to the sale of assets and debentures by Pine Cliff, which saw its revolving credit facility contract by 54 percent to C$85 million. Major bankruptcies in the industry have spooked bankers who probably didn’t realize they were so exposed, Chief Executive Officer Phil Hodge said by phone.

“That ripple effect is still going through our entire industry,” Hodge said.
All five banks in Pine Cliff’s syndicate wanted to reduce their exposure, prompting the producer to explore options, he said.

Leaving Calgary

Seeing opportunity with companies “starved for capital,” Stream has done three recent energy debt deals in Canada, said Ryan Dunfield, president and managing principal of the Calgary-based investor. It isn’t disclosing details. “As lending capital leaves Calgary," he said, "there isn’t enough excess lending from Canadian lenders to soak up the demand from borrowers.” 

Magnetar, an Evanston, Illinois-based hedge fund focused on corporate events, fixed income and energy, in June entered into an agreement to purchase C$70 million of unsecured five-year senior notes with a 9.875 percent coupon in producer NuVista Energy Ltd. The deal was announced alongside an asset sale and a 33 percent reduction in NuVista’s credit facility to C$200 million. The moves will allow the company to fully fund its growth plan for next year, NuVista said in a statement.

NuVista Chief Executive Officer Jonathan Wright, who is traveling this week, didn’t immediately return a phone message. Magnetar declined to comment.

Yield Hunt

Not all Canadian energy companies have needed to get creative with their financing, as investors seek refuge from pervasive negative interest rates in a global hunt for yield. Corporate-bond market deals in 2016 from some of the biggest producers, including Canadian Natural Resources Ltd. and Cenovus Energy Inc., have helped the country’s energy borrowers already top debt raised from bonds by the group for all of last year.

Alternative financing can also be expensive. The 9.875 percent coupon on the NuVista notes compares with a yield to maturity of 8.69 percent in the Bank of America Merrill Lynch U.S. High Yield Energy Index as of Aug. 22, according to data compiled by Bloomberg.

Still, the recent alternative-debt deals are spurring optimism that the sector is shifting toward the more complex capital structures that are typical in the U.S., which has a bigger market for high-yield debt, Pine Cliff’s Hodge said. Energy executives are looking to get away from the frequent and unpredictable nature of bank reviews, he said.

“There are a lot of different alternatives that people are now exploring,” Hodge said. “Historically, it’s been bank debt and equity.”

— With assistance by Doug Alexander

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