A "Massive" New Headache For Banks Has Emerged

Tyler Durden's picture

We have closely watched the spring borrowing-base redetermination period for US shale drillers because for many cash burning oil and gas companies it could mean the difference between survival and a quick death in bankruptcy court, as it represents the semi-annual event that determines if they have enough liquidity to sustain operations for the next few quarters or, alternatively, if they have to hand over keys to creditors.

As we previewed most recently on March 28, while many companies have already utilized the max of their revolver facility and are thus not immediately in danger of seeing their borrowing base yanked from underneath them (good luck to the banks who hope to see companies return funds following a net working capital redetermination without lots of legal costs) such as the names listed below...

 

... "the companies most at risk may actually be those with that currently have some of the most highly utilized borrowing bases, ranging anywhere from 62% for Contango to 94% for Vanguard. It is these companies that will suddenly find themselves with zero incremental sources of liquidity as the banks proceed to whack anywhere from 30 to 50% of their borrowing base, leaving them scrambling to preserve liquidity and ultimately leading to bankruptcy court, in no small part under the pressure of secured and soon to be DIP lenders (and in most cases, the post reorg equity) who will demand the least amount of Enterprise Value be wiped out in the months before bankruptcy. Here are the names."

 

Fast forward to this week when Reuters reports that "nearly two years into an epic oil rout, U.S. shale drillers that have upended global energy markets are finally feeling a credit squeeze as banks make their biggest cuts yet to their loans."

Every six months, oil and gas producers and their banks negotiate how much credit they should be given based on the value of their reserves in the ground. In previous reviews, banks were willing to offer borrowers some leeway, encouraged by producers' hedges against falling prices and their ability to keep cutting costs in step with crude's slide that began in mid-2014.

This time, with many companies' hedges largely gone and crude prices used in the reviews as much as 20 percent lower than six months earlier, banks are getting tough.

According to Reuters calculations, just a few weeks into the current round of talks and already more than a dozen companies have seen their loans cut by a total of $3.5 billion, equivalent to a fifth of available credit. 

 

"At that rate, $10 billion more of bank credit will disappear as a remaining $50 billion or so of credit lines come under scrutiny in talks that stretch into May" Reuters concludes.

That $10 billion will also decide which cash-burning companies are next the bankruptcy block.

But it's not just the shale drillers who are in danger as they see their liquidity evaporate.

As the WSJ writes today, and as covered here since January, it is the lenders themselves whose unfunded revolver exposure may suddenly become funded and expose them to even greater risks from the energy sector should oil not rebound far more forcefully and put US oil and gas companies back in the black.

How big is the exposure? Very big: $147 billion.

According to the WSJ "when big banks announce earnings starting on Wednesday, all of these oil and gas companies have counterparties, i.e., lender banks, and in a few days the spotlight will be on massive energy loans that most investors didn’t know much about until recently. These unfunded loans have been promised to energy companies that haven’t yet tapped the money. Many banks historically haven’t disclosed these loans but have begun to recently following the extended slide in oil and gas prices."

It is the total size of these loans that banks are finally scrambling to collapse (following our report earlier this year in which the Dallas Fed and the OCC pushed banks to keep as big as possible) as per the Reuters story above, but in some cases it may be too late.

In the first quarter, a handful of energy borrowers announced more than $3 billion of drawdowns against these types of loans. Those commitments are expected to trickle down to bank earnings and saddle firms with more energy exposure at a time they are trying to pare it back. “Let’s not sugarcoat it, this is not necessarily a loan a bank wants to make at this point,” said Glenn Schorr, a bank analyst at Evercore ISI.

The other problem: even as oil spikes on one after another headline, it has to get far higher for banks to no longer lose sleep over unfunded exposure. "Oil prices have risen in recent weeks, with the U.S. benchmark settling a $40.36 a barrel on Monday, but analysts say the unfunded loans to the sector are still a headache for banks at that price."

“With oil at $60, it’s not that big of a deal. With oil at $40, it becomes more of a source of concern,” Barclays analyst Jason Goldberg said of the unfunded loans. “Will companies draw down in difficult times?”

As a result, banks in recent months have set aside billions of dollars to cover potential losses tied to energy companies, a trend likely to continue as more loans go bad. But nowhere near enough the maximum possible drawdowns.

Which banks are most exposed to unfunded liabilities? According to the chart below it is the usual suspects: Citi, BofA, Wells and JPM.

 

The $147 billion in unfunded loans have been disclosed by 10 of the largest U.S. banks, according to fourth-quarter data from Barclays PLC. The four-largest U.S. banks— J.P. Morgan Chase & Co., Bank of America Corp. , Citigroup Inc. and Wells Fargo & Co.—pledged the majority of this amount.

Smaller U.S. lenders and large international banks have made billions more of these loans.

And while we wait to see if i) the O&G companies rush to drawdown their available revolers and ii) they subsequently file, forcing banks to charge off the loan losses, later this week Fitch Ratings is expected to release a report saying that nearly 60% of unrated and below-investment-grade energy companies are likely to have loans labeled as “classified,” or in danger of default under regulatory guidelines. “It’s grim,” said Sharon Bonelli, senior director of leveraged finance at Fitch.

As the WSJ adds, lenders routinely offer these commercial lines of credit to industrial companies. But the energy loans, often promised before prices started their steep decline, face a unique set of pressures.

James Dimon, J.P. Morgan’s chief executive, said in February that the unfunded loans are “the most unpredictable part of our assumptions” about the bank’s energy exposure. Mr. Dimon also said he isn’t expecting a large percentage of the unfunded money to get drawn because most of those promised loans went to investment-grade companies that he thinks are unlikely to need access to additional cash.

 

Banks hold reserves against unfunded loans in addition to reserves for loans that have been taken out.

Meanwhile, as expected, companies on the cusip of insolvency are rushing to max out their untapped revolvers.

Denver-based firm Bonanza Creek Energy in March announced that it drew $209 million from its credit facility from a group of banks led by Cleveland-based KeyCorp.  Bonanza Creek’s chief executive said in a news release that the move was “a risk management decision” and praised its “committed and supportive commercial bank syndicate.” A KeyCorp spokesman declined to comment.

Tidewater Inc., which provides vessels to the offshore drilling industry, in March said it took out the maximum $600 million from its credit facility led by Bank of America. The firm’s chief executive cited “the uncertainty surrounding the future direction in oil and gas prices,” in a news release announcing the withdrawal. A Bank of America spokesman declined to comment.

Amusingly, WSJ notes, in order to stem such withdrawals, some banks have negotiated “anti-cash-hoarding” provisions when energy firms have asked for amendments to their loans in recent months. These clauses require the companies to use extra cash to repay the balance on their credit lines in exchange, according to regulatory filings.

The problem with most of these companies is that they have zero extra cash as their burn rate is simply staggering and even a maximum drawdown on the revolver means just a few months of breathing room. And then there is also reality: for distressed firms facing bankruptcy that can contractually do so, “you’d seriously have to consider a game plan to draw down,” said Ian Peck, head of the bankruptcy practice at Haynes & Boone.

* * *

Finally, why is this headache "massive"? Because that's what the WSJ first dubbed it...

 

 

... at least until it got a tap on the shoulder from someone.

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Sentient B-ing's picture

Ask Corsine, He'll show you how to fund it you stupid shits.........

MillionDollarBonus_'s picture

Fracking is partly responsible for this oversupply, in addition to all the environmental problems it causes. It's shocking that Donald Trump is actually talking about removing bans on fracking and allowing our environment to be destroyed. Frackers need to FRACK OFF, and leave our environment alone. Another trend that is causing oil prices to fall is a growing demand for cleaner, green technologies such as wind and solar. Bernie Sanders wants to increase investment in these promising technologies, which I think is a smart idea. We don't need oil anymore - this is the 21st century and we need to start getting off of fossil fuels once and for all. Why are we still producing CO2 pollution when there are so many alternatives? It just doesn't make any sense.

https://accredited-times.com/2016/04/12/the-science-of-economics-how-eco...

Bill of Rights's picture

It just doesn't make any sense.

 

Neither do any of your postings, zero sense.

Dick Buttkiss's picture

MDB's sarcasm continues to be too subtle for most ZHers.

y3maxx's picture

--Million dollar bonus makes tons of sense.

Oil sucks, while solar and wind energy does make sense.

--What hasn't been discussed is how Nuclear energy will soon wipe out the human race.

Nuclear energy will go down as the worst industry ever utilized.

ZH Snob's picture

a new headache for big banks is a tonic for me.

Dubaibanker's picture

Only people who cannot affford 100 dollar HP Laserjet color printers with 200 dollar bi monthly cartridges have problems. Rest of us are all OK.

N0TaREALmerican's picture
N0TaREALmerican (not verified) Apr 12, 2016 11:38 AM

But these numbers are so tiny.    How can they be a problem?

exi1ed0ne's picture

How many hours of QE does that translate into?  This is a rounding error compared to the rest of the system.

Joe Cool's picture

Nothing to worry about...Everything's fine...

KnuckleDragger-X's picture

Ignore that man behind the curtain. This is one of the reasons that I think the next QE will be called something else, and with a patriotic name attached......

BlindMonkey's picture

"Mr. Yellen, Line 1 please.  The President would like to have a word."

zeropain's picture

140 billion for large banks in not that much, but hedge funds will blow up like crazy.

BadDog's picture

Think in $1 trillion terms, as in student and auto loans.

Yukon Cornholius's picture

Agreed. Anything less than a trilly and I'm not interested. Hyperinflation is best in huge leaps and bounds.

pods's picture

Wait till they propose the FED backstopping these loans to "help main street."

blown income's picture

Fuck em'..

 

The past 8 years have been hell for everyday folks like myself

 

And in ain't going to get any better! 

 

 

Captain Chlamydia's picture

Jus' sayin' that the grammar, interpunction and typo's really suck in this article. And lately, it's getting worse. Come on Tyler, you can do better. 

Professorlocknload's picture

"Massive". MASSIVE! I tells ya. MASSIVE.

buzzsaw99's picture

fuck yeah i'd draw as much credit as i could and give myself a big fat bonus the same way the bankers do. FUCK YEAH!

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Apr 12, 2016 11:53 AM

This tells you all you need to know, from a Bloomberg article:

“We’re all being as appropriately tough to make sure that we protect the interests of the bank,” John Shrewsberry, Wells Fargo’s chief financial officer, said on a January call with analysts. “We were working with each customer to help them work through this. It doesn’t do us any good to accelerate an issue, or to end up as the holder of a number of oil leases as a bank.

MrRadiologist's picture

Everything is fine people, nothing to see here, dow is going to 30.000, okay? Okay.

venturen's picture

We must rescue the hard working oil drillers....3-2-1 the US government will back all the loans and give billions to Goldman, Citi, JP Morgan...and they can save the oil patch!   /SARC!

csmith's picture

The headline was changed because the problem is not "massive" at all. The $147 billion number is less than 1.7% of total loans outstanding at U.S. banks. Get real.

nakki's picture

So the FED digitally creates $150 billion, makes the banks "good" and the banks own the oil.

 

SubjectivObject's picture

MasDurBating ingnored.

I love it.

Atomizer's picture

I will donate shovels to each Central Banking personal. Sit back, watch them dig there own grave. Comedy Gold moment. 

Grandad Grumps's picture

Interesting finger puppetry Jamie.

Squid Viscous's picture

Jamie, you should spend more time worrying about your daughter, she's a Grade A slut

Phillyguy's picture

Another reason for the stock market to go up.

Sudden Debt's picture

Just take it from the depositors who still have money and let them believe all their money is still there!

So what was the average saving rate... 1200 dollars...

So that's about 100.000.000 people who actually still have some savings who will lose it all....

U S A!!! U S A!!!

doggis's picture

NO PROBLEM - NO WORRIES - CANADIAN BANKS HAVE NO "RESERVES" FOR THEIR OIL AND GAS LOAN BOOK AT ALL, SO WHATS THE "BIGGIE"?

robertocarlos's picture

I have the exact same borrowing capacity as Postrock Energy, $39,000, but the bank would never lend me $63,280. The bank would save me from myself.

HappyCowboy's picture
HappyCowboy (not verified) robertocarlos Apr 12, 2016 12:38 PM

There's a Wells Fargo stagecoach on the way with your dough.

Hang in there.

Hohum's picture

"Liquidity is a fluid concept."  J Yellen

Insurrexion's picture

 

 

I thought fucking Jamie Dimon was dying of cancer?

As the story develops, check this guy's interesting Panama Paper series out.

https://www.linkedin.com/pulse/panama-papers-hack-part-four-john-m-cunni...

 

Jackagain's picture

The cancer died of food poisoning....

HappyCowboy's picture
HappyCowboy (not verified) Apr 12, 2016 12:42 PM

I'm not sure which would be more appropriate for Jamie, a lamp post or a limb on a mighty oak.

One thing is for sure though.

He would have been up near the front of the line in 1933 Germany.

HappyCowboy's picture
HappyCowboy (not verified) Apr 12, 2016 12:46 PM

The Fuhrer knew how to deal with the likes of Dimon.

Germany went from out of control inflation and a 70% unemployment rate to no inflation and full employment within one year.

HappyCowboy's picture
HappyCowboy (not verified) HappyCowboy Apr 12, 2016 12:53 PM

"Just the facts Ma'am."

Joe Friday

Dragnet

Jackagain's picture

Yeah....full employment was the army.

Theonewhoknows's picture
Theonewhoknows (not verified) Apr 12, 2016 12:51 PM

After 2008 meltdown the banking system was consolidated - now it will be energy sector. Fed has to print. It's in their blood to not only 'save' important companies but also to inflate the debt and escape it through increased money supply. Problem with this inflationary escape of debt - idea that through increased money supply (gov spending) you can have inflation bigger than your interest rates accrue on your debt - is that you are TAXING everyone with savings through destruction of money. What is more - if you could have some sort of a guarantee that whatever government spends money WILL WORK - you don't have it. If it is a failure, it is huge and I mean bigger than 2008. Now we have many examples of such risks - Auto loan bubble, student loan bubble, S&P bubble not to mention bankrupted governments that can go to war not to pay the debt...
this is called war on cash. We see it in front of our eyes and it will be bad. http://independenttrader.org/war-on-cash-a-piece-of-a-bigger-puzzle.html

Jackagain's picture

Buy silver and really piss them off....

Government needs you to pay taxes's picture

Time to go long oil and let the Fed's plunge protection team do the work.  Pump like a fresh stud @ his first porn tryout, Yellen! pump!

DaBard51's picture

great little joke there, "the cusip of insolvency" in about the 22nd paragraph...

aztrader's picture

With no mark to market, why should anyone care. 

hedgiex's picture

Another bailout for Citi, etc ? More consolidate bigness thereafter and easier for the apex to park and dispense their monies in the labyrinths of massive regulations that mean anything goes with conflicting rules and lack of clarity. This is only the first layer of smoke before it even gets into the judiciary system.