One year into the collapse of crude oil prices, cuts to the
Reserve-Based Lending facilities (RBLs) of high yield (HY) E&P companies
by bank syndicates have been relatively light, according to Fitch
Ratings.
Fitch reviewed a sample of 25 HY E&P issuers with high (>50%) liquids
exposure, and found that the average borrowing base reduction as of
early December was just 19% vs. year-end 2014 levels. The reduction in
borrowing bases is substantially lower than the drop in spot and forward
oil prices over the same period (approximately 60% and 50%,
respectively). Seventy-two percent of the Fitch-defined sample saw
reductions, while the remaining 28% had their bases either affirmed or
increased, with the latter mostly due to acquisitions.
"Asset sales and capital markets transactions provided important life
lines for high yield E&P companies this year, and have helped many banks
to manage their exposure to the sector and to individual names," says
Mark Sadeghian, Senior Director, Corporates." Opportunities for banks to
further manage their exposure to HY E&Ps in 2016 will continue to be
highly dependent on borrowers' ability to access the capital markets."
Across our sample, 17 companies (68%) tapped capital markets in one way
or another (equity, preferreds, 2nd and 3rd lien debt) while 12
companies sold off assets. In many of these cases, proceeds were used to
either take down short term bank exposure (repay revolver borrowings),
or to reduce longer term exposure (step-down in lender commitments).
Capital markets access varies by issuer. Many HY deals took place in a
relatively short window in the second quarter. Since that time,
deteriorating energy fundamentals have resulted in markets being closed
for many companies.
"Worsening sentiment around crude oil fundamentals in December and the
bond market liquidity crunch among high yield E&P companies may leave
banks in it for the long haul, with fewer options for lowering their
exposure if lower-for-longer persists," says Christopher Wolfe, Managing
Director, Financial Institutions.
Semi-annual oil price deck re-determinations, which reduced the size of
credit lines to E&Ps, and revolver pay-downs on RBLs have been the
primary tools for banks to manage their lending exposure. But there
could be some additional criticized assets as oil and gas producer
hedges roll-off in 2016, and there will likely be continued pressure on
oil field services loans.
Hedging has been an important credit mitigant for high yield E&Ps this
year; however the lack of opportunities to hedge production at full
cycle costs since the downturns suggests the value of hedging to prop up
borrowing base values may diminish significantly unless the market turns
around.
The full report, "Revisiting US Borrowing Bases One Year On: Cuts
Moderate Despite Increased Headwinds," is available at www.fitchratings.com
or by clicking on the link.
Additional information is available at www.fitchratings.com
Revisiting U.S. Reserve Borrowing Bases One Year On (Cuts Moderate
Despite Increased Headwinds)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875484
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