HOUSTON—Since it is becoming more difficult to secure bank credit, and a lot of existing energy loans are still under pressure, new avenues to secure funding need to open up. This is all the more true as producers continue to push the boundary on how many wells they drill on a pad or within a section in the shale plays.

Hence, the rise of the “non-bank bank” to serve energy companies hungry for capital.

“There is a looming need for more capital,” said Mark Green, president of Madava Financial, speaking to the Houston Energy Finance Group recently.

“The RBL [reserve-based lending] market remains large, but it is in transition,” he said. “Mezzanine lenders and credit funds have generally been the next layer of available capital, but another direct lending alternative is needed to fill the gap between these capital alternatives.”

Madava is a private, energy-focused finance company formed in early 2017 by Robb Turner, one of the co-founders of ArcLight Capital. The company is focused on providing capital alternatives through direct lending to middle market upstream and midstream companies. It is not a credit fund, but rather a specialty finance company that has raised permanent capital.

A confluence of trends has led to this opportunity, said Green, who joined Madava in May 2017 after 12 years with Wells Fargo Energy Capital.

Green cited the example of several foreign and domestic banks that closed down or significantly reduced their oil and gas portfolios during the downturn, and the exit of industrial-type lenders such as GE Capital. The ability of traditional commercial banks still in the game to engage in stretch lending to energy companies has moderated as well, thanks to the Office of the Comptroller of the Currency’s (OCC) revised and stricter lending guidelines.

“The E&P industry’s need for capital is still growing,” Green said. “For example, companies are increasingly drilling multiwell pads. We recently saw a Delaware Basin company with 24 wells planned in one section, which obviously results in a very large call on capital.”

At the same time, just as the OCC narrowed the fairway on what is considered a “pass” RBL or credit, many of the credits extended during the downturn are coming due soon. Over $208.6 billion in upstream debt existed at the end of 2017, and an estimated $76 billion was not in compliance with the new bank guidelines at the end of 2016, he said.

“As these credits mature and roll off, some of them will be renewed—but many will not,” he said. “We think there is a gap where some companies cannot renew their RBL and thus, will need to explore other sources of capital.”

Green said the senior-secured RBL was bulletproof and loan recoveries averaged 98% until 2014. The recovery factor then experienced a significant drop off—down to 81%—through 2015, according to Moody’s Investors Service. As a result, numerous second-lien facilities and unsecured bonds were “completely wiped out.”

Madava seeks to fill a growing gap between first-lien lending provided by the regulated banks and other capital providers that include private equity, hedge funds and energy credit funds.

“We are targeting middle market upstream and midstream companies, many of which will be sponsor-backed,” Green said.

Madava looks primarily to provide uni-tranche facilities in the middle market, well hedged but relying as heavily on PDP reserves as banks do. The company will advance 70% to 100% of PDP with a typical size of $25- to $100 million. It also will consider the second-lien/Holdco type of structures or preferred equity.

In March, Madava closed its first transaction with XRO Energy LLC. The company arranged a $100 million uni-tranche debt facility for XRO's acquisition of assets in Wyoming's Washakie/Wamsutter field from Linn Energy.

For more on alternative debt sources, see Oil and Gas Investor’s September 2018 issue.

Leslie Haines can be reached at lhaines@hartenergy.com.