Banks have been pulling back from lending to energy companies.
Hedge funds and buyout firms have been stepping in to the void.
The oil price is down more than 50% since mid-2014, and banks are less eager to lend to struggling oil companies. Regulators are also wary of risky junk-rated loans and bonds.
“Due to the fall out in credit crisis, regulators have viewed energy as a systematic risk to the banking sector, so they’ve really stepped in this time around and imposed regulatory constraints as to how banks can handle these reserve-based loans,” Don Dimitrievich, managing director at Highbridge Principal Strategies, said in a panel at the Debtwire investors summit Tuesday. “Now banks can’t be as accommodative as they’ve historically been.”
Wells Fargo, which has some of the riskiest exposure among the banks, has cut available credit lines to oil and gas companies by 3%, or $1.3 billion to $40.7 billion, according to its presentation to investors Tuesday. The San Francisco-based bank expects to see further stress in the sector this year. JPMorgan Chase and Bank of America also said they had to set aside more money to cover soured energy loans last quarter.
Alternative asset managers in contrast have been moving in to the space. They can provide flexible capital and have the ability to be more patient, according to Daniel East, principal of Carlyle Group’s energy mezzanine opportunities fund.
Every six months, oil and gas producers negotiate how much they can borrow from their banks based on valuations of their reserves backing these loans. Lenders have previously been willing to provide some leeway, Dimitrievich said, but that’s no longer the case.
There are companies with smaller credit lines that didn’t want to have banks look over their shoulders every six months, East added.
“When we’re making a loans to energy companies, we look at the collateral agreement to make sure the capital is going to repay existing indebtedness, that the money’s good, and a variety of commodity outcomes,” East said. “To the extent that there’s an area where you can create value on the drill bit, we are certainly okay with that and we can advance capital more rapidly and much more aggressively than lenders in the banking community.”