The credit squeeze threatens to spur more cuts to spending and staffing levels, and in extreme cases push companies over the edge into bankruptcy.Norm Betts/Bloomberg
Canada's big banks are cutting credit lines to struggling energy companies, heaping more financial strain on an industry battered by the collapse in oil prices.
Bank of Nova Scotia, Royal Bank of Canada and National Bank of Canada are among those reducing credit lines as the lenders complete their semi-annual review of borrowing limits in the hard-hit energy sector.
Alberta's government-owned bank, ATB Financial Corp., is also clamping down as weak oil prices prompt fears that debt-saddled energy companies will default on loans they can no longer afford to service.
The credit squeeze threatens to spur more cuts to spending and staffing levels, and in extreme cases push companies with the shakiest finances over the edge into bankruptcy. That is an outcome banks have so far sought to avoid, opting instead to ease lending restrictions where possible in hopes that oil prices recover.
Now, their patience is wearing thin, despite a rally that has nudged U.S. crude prices back above $40 (U.S.) a barrel from as low as $26 two months ago. It puts banks in a bind: Onerous lending restrictions could choke off a key source of liquidity just when cash-starved energy companies need it most, increasing the risk of default among borrowers.
"I think you will definitely see some more bankruptcies and some more pain over the next six months," said Michael Driscoll, senior vice-president at DBRS Ltd. who covers North American banks.
"But that being said, banks are very good at protecting their own economic self-interest, so if they think that they will lose less money in the long run by relaxing a covenant or two, then that's what they're going to do."
Such relief is no longer free, however. Banks are trading additional concessions on debt obligations for security over assets and stricter terms on loans, among other measures.
Last month, Baytex Energy Corp. won a reprieve on certain lending conditions even as its credit facility was chopped by roughly 30 per cent, to $575-million. In exchange, it granted its banking syndicate first priority security on its assets, meaning that the company could be forced to liquidate its assets should it enter receivership.
On Wednesday, Perpetual Energy Inc. said its credit facility had been chopped to $6-million (Canadian) from $20-million previously, joining a growing list of producers that have seen their borrowing limits tightened.
Meanwhile, Moody's Investors Service Inc. downgraded $254-million (U.S.) of debt held by Lightstream Resources Ltd. deeper into junk territory. It said the company is likely to restructure its debt or seek creditor protection this year as it struggles to make basic payments after an expected reduction in its borrowing base.
"Some of the fixes that folks thought were conceivable in 2015 are not in 2016 because hedges are burning off and it is getting tougher to refinance debt," said Charles Beckham Jr., a Houston-based lawyer at Haynes and Boone LLP who specializes in oil and gas bankruptcies. "As a result, the liquidity for those companies will decline. They are literally coming up to the cliff."
In Canada, bank executives have sought to ease investor fears over bad loans in the space even as they step up provisions for credit losses.
Scotiabank chief executive officer Brian Porter said this week that its energy exposure represents 3.6 per cent of the bank's total loan book, and that the firm plans to cut the borrowing limits of its energy clients.
He did not say by how much, but he indicated that the reduction would be on par with rival RBC, which has said it would cut borrowing bases by 15 per cent to 20 per cent. Executives at National Bank have also signalled reductions in credit lines are likely in light of deteriorating commodity prices.
Until recently, analysts and restructuring lawyers say banks have been reluctant to push struggling oil and gas producers into receivership. One reason is they don't want to be stuck selling assets in what remains an extremely sluggish deal market.
"We've all learned our lesson that you can create your own problems sometimes," Dave Mowat, chief executive officer of ATB, said in an interview. "Everybody is trying to work together with the companies to really find as much daylight as they can, as much runway for people to get through this."
Still, casualties are mounting. In March, ATB called in loans totalling more than $17-million (Canadian) to Millennium Stimulation Services Ltd. after the privately held firm skipped debt payments.
The bank is also among lenders to Sanjel Corp., the family-owned international oil services company that sought creditor protection earlier this month. Scores of others, including Quicksilver Resources Inc., Argent Energy Trust and Spyglass Resources Corp., have also buckled.
Last year saw fewer creditor-driven liquidations than expected, but 2016 is off to a brisk start. "There have been a significant number of receiverships in the junior space," said Sean Collins, who leads the bankruptcy and restructuring practice at McCarthy Tétrault LLP in Calgary.
Energy companies with loans tied to the value of their oil and gas reserves are under severe pressure as the outlook for future prices has deteriorated. Banks have been willing to work with borrowers, but this leniency will not last as crude prices remain well under their mid-2014 peak.
Mr. Collins said more boards are beginning to consider their options around formal restructuring sooner.
"Any restructuring professional will tell you that the biggest problem is people coming to us too late," he said. "There are many [companies] that haven't survived, many that won't survive. We have seen an increase in activity, and there doesn't seem to be any relief in the offing. It's a tough pill to swallow."
With files from Jeffrey Jones in Calgary and David Berman in Toronto