From Reuters/Business Insider
NEW YORK (Reuters) – Troubled U.S. energy companies, maneuvering for stronger negotiating positions if filing for bankruptcy, are racing to tap cash still available under existing reserve-based loan commitments before banks cut their credit access next month.
In April, lenders, in semi-annual valuations of oil and gas reserves backing these loans, are expected to cut available credit to many energy companies based on deeply depressed collateral prices.
Earlier in March, Stone Energy joined a growing pack of companies, including SandRidge Energy and Linn Energy , drawing down the full amount remaining under its credit facility. Stone also said its borrowing base likely will be cut below its current borrowings during the spring redeterminations.
“Every company out there is nervous that if they don’t draw in the next couple of weeks, with determinations coming up, banks will finally start saying ‘no,’” an investor said.
Drawing down cash before banks’ contractual commitments change is a tactic used widely in other previously troubled industries, including autos and airlines.
These “extraordinary draws” are a new concept in the oil and gas sector, said Buddy Clark, partner at Haynes and Boone in Houston.
Without sufficient cash, a company in bankruptcy would typically need debtor-in-possession (DIP) financing.
“When providing a DIP, lenders will want to button down everything that hasn’t already been pledged as collateral,” he said. “Having unencumbered assets in a bankruptcy gives the debtor a bargaining chip with the various constituents at the table, which they would likely have to give up in order to get a DIP loan.”
About one-third of all energy companies may fail unless prices recover, consulting firm Deloitte said last month.
