December 18, 2015 - 10:56 AM EST
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Fitch: Banks Tread Lightly on Borrowing Base Redeterminations for HY E&Ps

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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Fitch Ratings
Mark Sadeghian
1-312-368-2090
Fitch Ratings, Inc.
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Chicago, IL 60602
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Media Relations
Alyssa Castelli, +1-212-908-0540
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Source: Business Wire (December 18, 2015 - 10:56 AM EST)

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