While MatlinPatterson's Portfolio Manager Michael Lipsky can't wait to enter the distressed junk bond space, thanks to "$74 billion in debt trading at under 25 cents on the dollar, and $205 billion trading at under 70 cents on the dollar", he agrees with BofA's Michael Contopoulos that it is still far too soon to buy. The question, according to Lipsky, is what capital structure works in the aftermath of several recent "bombs" such as Magnum Hunter which are trying to emerge from bankruptcy with negative EBITDA, and as a result both secured debt and the DIP are getting equitized.
The punchline of Lipsky's speech was that due to the persistent collapse of oil prices, the bankruptcy process has been turned on its head: "we always assume that secured lenders would roll into the bankruptcy become the DIP lenders, emerge from bankruptcy as the new secured debt of the company. But they don't want to be there, so you are buying the debt behind them and you could find yourself in a situation where you could lose 100% of your money."
Which brings us to Lipsky's moment of zen: "all these derivatives bets on oil, let's just own oil; and on the other side we are actually short, focused more on the EM oil exposure."
But that's not what caught our attention.
Recall what Credit Suisse's James Wicklund said one weeks ago in his weekly energy sector recap not:
Give and take between the Comptroller of the Currency and the Fed generated stories of big banks being a bit more lenient rather than swamping regional banks with failures. E&P companies had their borrowing bases upheld, for now, but were told to generate additional liquidity or have those bases cut in the spring.
What this means is that what we reported one month ago about the Dallas Fed "advising" banks to "not to force energy bankruptcies", something which also spilled over in the Fed advising banks to limit mark-to-market on energy exposure and to use a generous strip pricing, was spot on.
Rumor Houston office of Dallas Fed met with banks, told them not to force energy bankruptcies; demand asset sales instead— zerohedge (@zerohedge) January 11, 2016
A few days later, we reported the Fed's prompt, if oddly phrased, reply:
Now, thanks to Credit Suisse and Lipsky we have the full story: the meetings between the Dallas Fed and the banks did indeed happen, however, as we suspected, the Fed used a neat loophole.
Fast forward to 2:17 into the clip for the answer on what it was (which is also the reason why banks don't want to be at the top of the capital structure of energy companies any longer):
"The OCC is breathing down the neck of the large commercial banks to limit their energy exposure."
Full clip below:
And there you have it: when the Fed responded that there was no truth to our story with the curious explainer that "the Fed does not issue such guidance to banks", even as it did everything else we disclosed, it was actually telling the truth: because between Credit Suisse and MatlinPatterson we now know that the explicit guidance actually came from the Office of the Currency Comtroller, the regulator operating under the US Treasury umbrella which however is completely useless without Fed input.
From its description:
The OCC charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks. The OCC is an independent bureau of the U.S. Department of the Treasury.
So here is what happened: everything we said about the Dallas Fed meeting with banks, going through bank loan books, and urging to limit bankruptcies, demand asset sales, as well as suspend mark to market in explicit circumstances, was true, however the explicit "guidance", precisely for FOIA avoidance purposes, came not from the Fed but from the OCC.
Needless to say, we are immediately submitting a FOIA to the OCC next, demanding to know whether it was the Office of the Comptroller of the Currencywhich was the US government entity that advised US banks to do all those things which we revealed back in mid-January, and which the Fed desperately tried to deny.
Finally, we are certainly looking forward to the Dallas Fed follow up response to this post.