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The Shale Party's Over: "Closed" Bond Market Means "Restructuring Is Inevitable"

With the market's perceived risk of default across the energy space at record highs, it should be no surprise that willingness to lend (even for the greater-fool reach-for-yielders) is collapsing. As Bloomberg reports, oil services companies are finding alternative ways to raise cash and repay debt after falling crude prices has made it difficult for them to get funding from traditional sources. As one restructuring firm warned, "bond markets are closed for these companies, especially small ones, and banks may not be lending to them at this stage," with another ominoulsy warning, "getting new liquidity in this market could be a painful exercise. For many companies, financial restructuring seems inevitable."

 

Credit risk for Energy firms has exploded...

As Bloomberg Briefs reports, energy companies are being shut out of bond markets and lenders are reducing credit lines after prices dropped about 60 percent from last year’s peak.

Services companies in Europe are starting to run out of cash as producers from Royal Dutch Shell Plc to Petroleo Brasileiro SA cut their own investments and delay projects.

 

“Bond markets are closed for these companies, especially small ones, and banks may not be lending to them at this stage,” said Nigel Thomas, partner at law firm Watson Farley & Williams in London. “Services companies need to buy time to survive during the downturn and alternative investors are able to give them that, albeit at a very expensive cost.”

 

Bonds issued by oil-services businesses globally dropped to $6.7 billion this year, on pace for the least in a decade, according to data compiled by Bloomberg. French oilfield surveyor CGG SA said it had to cancel a loan in July because banks had offered unfavorable terms.

 

Charts: Bloomberg

 

Energy-services companies are searching for new investors and funding strategies as even lenders of last resort pull back. Hedge funds and private-equity firms that previously sought to lend at high rates are becoming reluctant to step in after getting stuck with losing positions.

*  *  *

However, the situation is even worse than that, as The Wall Street Journal reports, banks are clashing with regulators over loan reviews that could crimp the flow of new credit to the oil patch.

The dispute is focused on the relatively narrow issue of loans secured by oil and gas companies’ reserves, but it highlights the much broader point of how postcrisis regulation of the financial industry is affecting sectors far from Wall Street.

 

On one side are the bankers who have been grappling with the plunge in oil prices and the need to shore up billions of dollars in credit extended to the energy industry. On the other are regulators eager to prevent another financial crisis while not knowing what it might be.

 

Caught in the middle are the small- and medium-size exploration and production companies that rely on credit lines that use their energy reserves as collateral. Banks are now beginning their fall reviews of the quality of that collateral and worry regulators could ding them for making loans the banks think are prudent.

 

...

 

“We disagree with the regulators,” said Francis Creighton, executive vice president of government affairs at the Financial Services Roundtable, an industry trade group. “These are good loans, they have a history of performing…we think their analysis is incorrect on this.”

*  *  *

So far, the regulators’ approach is winning out.

“It all flows downhill,” said Steve Moss, a bank analyst at Evercore ISI. “If the regulators are going to be tougher on the banks, expect the banks to be tougher on the borrowers.”

*  *  *

Leaving the endgame inevitable...

“The service industry is under enormous pressure as oil companies continue to strive for significant cuts,” said Terje Fatnes, an analyst at SEB Enskilda AS in Oslo. “Getting new liquidity in this market could be a painful exercise. For many companies, financial restructuring seems inevitable.”