from The Wall Street Journal,
Even after a steady drop in prices, banks are being lenient.
Banks are betting that pain in the oil patch is short-lived.
Even after a steady drop in energy prices through the second half of the year, banks in the U.S. are being lenient with cash-strapped companies rather than set tougher lending constraints that could make survival more difficult. The strategy is helping energy borrowers, but could result in higher losses for lenders if prices don’t rebound.
Many energy executives expected banks would harshly cut credit lines after the fall redetermination process or—more severely—declare borrowers in breach of their debt terms, or covenants. But little of that has come to pass.
Banks were also optimistic in their projections for future oil prices, forecasting that the U.S. oil benchmark WTI would average $47.36 in 2016, according to a late-October survey of 32 banks from Macquarie Capital Inc. The banks predicted the price would continue rising in the following years.
While banks only review borrower reserves twice a year, the lenders tie the amount of money certain energy companies can borrow to price projections that can fluctuate more regularly. If so-called price decks are lower, that digs into available liquidity for clients relying on that borrowing. J.P. Morgan Chase & Co., Royal Bank of Canada and BB&T Corp. are among banks that have adjusted their price decks more frequently this year given the volatility of oil and natural gas prices, people familiar with the matter said.
Winston-Salem, N.C.-based BB&T changed its price projections seven times so far in 2015, as opposed to the typical four times. “I was hoping the prices would go down and bounce back quickly,” said Jeff Forbis, BB&T’s head of energy lending, adding that the slump has already “gone on much longer than anticipated.”
Banks were hesitant to take harsh steps, because doing so could set off a chain reaction in which their borrowers ultimately fail and banks could end up owning the assets.
Still, sometimes foreclosure can’t be avoided. This week, Dallas-based Cubic Energy Inc. filed for bankruptcy protection and handed over control of the company to Wells Fargo and other debtholders. Wells Fargo declined to comment.
Previous energy busts, like the one in the 1980s, resulted in major losses at banks, with painful ripples through the broader economy. Experts say that seems unlikely to happen this time around
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