Results from an informal survey of some 45 energy-lending banks, from multinationals to small regionals, show that 70% of them are in a “hold position” on new deals, said Dan Steele, senior vice president of energy lending for Bank of Texas. He spoke at a capital-access panel at Oil and Gas Investor’s recent Energy Capital Week workshop.
“Another 20% of the banks indicated that they may be exiting the business or reducing their exposure,” he said. “The remaining 10% is actively involved in the pursuit of new deals.”
For those that are doing deals, the “key hot points” are the cost of the banks’ funds, tightened underwriting criteria, restrictive covenants and shorter pay-back periods, he said. Within the past 12 months, lending rates have moved upward by as much as 125 basis points (bps). Fees associated with deals have also increased by an average 50 bps.
“One new or developing phenomenon I have seen in these transactions, and it is prevalent throughout the industry, is the insertion of interest-rate floors. With Libor rates getting down as low as they have, over time, many banks want to cover the cost of their capital and add some spread on top of that. The interest-rate floors are rising anywhere from 4.5% to 5.5%,” said Steele.
Another hot point: oil and gas reserves used as collateral for loans. “Proved, developed and producing is the hot button for all bankers right now,” he said. “The other two Ps have been removed from bankers’ vocabulary.”
Robert Chambers, president, chief executive and founder of Chambers Energy Capital, a newly formed credit-opportunities fund, noted that times are tough in the leveraged-debt market. Leveraged-debt is below conforming and borrowing-base loans and above preferred equity and common-equity convertible notes. In the past, leveraged-debt deals have been fulfilled by the high-yield debt market.
“Recently, we have had the emergence of the second-lien market, which has been funded mostly by hedge funds, which has been a problem,” said Chambers. “So, how bad is it? It’s as bad as it has been in a generation.”
The price of the average B-rated loan spiked in 1998 and 1999 due to events such as the Russian credit default and the blow-up of a large hedge fund. “They were blips, compared to what we have now,” he said. “The average B-rated loan is trading 77 cents on the dollar. It’s staggering, because the single-B market is a $200-billion market, so banks, hedge funds and other debt providers have lost $60 billion in the past nine months.”
Most of the providers for this market have exited the business, said Chambers. The days of 100% financing for development are “pretty much gone.”
Clint Wetmore, a founder of Post Oak Energy Capital, said that the Houston firm saw the credit markets start to unwind in 2008. “We saw senior lenders take a wait-and-see approach and private-equity shops close. A number of capital providers, investment banks and hedge funds simply went away. We saw an opportunity to fill that void.”
Post Oak started focusing on second-lien, mezzanine debt and convertible preferred. In early 2009, Post Oak began to originate and participate in secondary market offerings, initially priced with 15% to 18% interest rates.
“Since then, we started losing more of those deals,” he said. “People are able to access lower cost of capital, which means capital is coming off the sidelines at a lower cost for guys who are putting out the term sheets, too.”
Now Post Oak is looking for mezzanine-debt deals and convertible preferred. “Mezz debt is a lower coupon than second-lien and exposes us to the equity upside, whether that is through overrides or warrants we can structure as the asset and the team make sense.”
Convertible preferred is also a lower coupon, with liquidity preference, usually with a call feature. “The conversion allows us to participate in the corporate upside,” said Wetmore. “We are targeting midsized companies, fewer start-ups, but more organic-growth companies with acquisitions and development drilling, with $40- to $75-million deal sizes.”
—Jeannie Stell
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