High risk oil and gas loans grow: US Fed

OREANDA-NEWS. November 10, 2015. About 12pc of loans to US oil and gas companies are rated substandard or hard to collect, a significant increase from 2014, according to the latest review of large syndicated loans by the US Federal Reserve.

Loans to exploration and production companies and service providers that do not have adequate backing by the companies' collateral, market value or ability to pay, shot to \\$34bn this year from \\$7bn last year. They accounted for 15pc of substandard syndicated loans, up from 3.6pc last year.

The Federal Reserve conducted its review in May-June and released its findings today.

Non-bank entities — such as hedge funds, insurance and private equity firms — hold two-thirds of loans considered substandard, US banks hold 18pc and non-US banks hold another 15pc. The Federal Reserve did not separate the ownership of substandard oil and gas loans by the institution type.

The rise in risky loans in the oil and natural gas space accounted for almost all of the \\$31bn increase in total substandard loans in the US since 2014.

The sustained decline in oil prices and debt accumulated as a result of "aggressive acquisition and exploration strategies" is behind the increase, the Fed said. Most borrowers reacted to the decline in commodity prices by issuing second lien debt to boost liquidity, cut capital expenditures and other spending and dividends.

The Fed noted that the companies cannot rely on revenue from hedges to shield them for a long time, which would affect future operating cash flows and the ability to service loans. But "banks are showing flexibility in working with borrowers by relaxing leverage covenants and allowing customers time to curtail borrowing base over-advances."

The Fed conducted its review together with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. The Shared National Credits program assesses the risk of syndicated loans greater than \\$20mn made by banks and other financial institutions.

Total syndicated loan commitments covered by the review totaled \\$3.9 trillion, an increase of \\$518bn since 2014. Oil and gas borrowing amounted to \\$277bn, or 7.1pc of the total.