About all those high-yield energy bonds…
I’m not an energy person. So I was delighted to learn about reserve-based lending and the semi-annual “redetermination of the borrowing base” procedure that oil companies undertake with their bank lenders.
It’s no secret that energy companies have borrowed heavily from Wall Street to fund their shale exploration. With the price of oil halved from its peak last year, those companies are under pressure. One place this is showing up is in the world of bank credit lines to energy firms, and also junk-rated bonds they sold.
There is lots of information in the below article, including talk of the hedge funds and private equity firms waiting in the wings to “rescue” energy firms on potentially punitive terms. One thing I would like to stress is a rather unsavory dynamic at play here. If energy companies have to turn to second-lien financing to plug holes in their bank loan facilities, the claims of existing unsecured creditors – i.e bondholders – get pushed further down the payment hierarchy. Because so many of these bonds have been issued on a cov-lite basis, subordinating them becomes even easier. In short, there are interesting times ahead for the high-yield energy sector.
April in Texas traditionally marks the start of the spring thunderstorm season. This April, the tempestuous weather looks set to be accompanied by an additional financial squall for the state’s oil and gas companies as banks begin cutting back on the reserve financing on which these firms rely.
Such financing is typically re-evaluated twice a year, usually in October and April, and is tied to the value of the borrowing firms’ oil and gas reserves and related assets such as pipelines.
With the price of US crude now less than 50 per cent of its recent peak of $107 a barrel, the likely consequence is that banks will significantly reduce their lending to energy firms across the US, forcing companies to look for alternative sources of financing on more punitive terms.
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Energy bondholders at risk as bank loans ebb
Energy bondholders could lose out in refinance deals
A dozen ways to stretch your borrowing base
One thought on “About all those high-yield energy bonds…”
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