The energy sector is facing a season of pain as its loans are renegotiated.
This is shaping up to be a deeply unpleasant autumn for junior energy companies and the banks that lent them hundreds of millions of dollars.
“Everyone got hall passes until the fall, but the principal is going to be standing in the hall wanting his passes back.”– Bruce Edgelow, ATB Financial
Banks typically review their loans twice a year, but the last review took place in the spring when it looked as though oil prices might be poised to make a recovery. There are no such illusions now.
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“Everyone got hall passes until the fall,” said Bruce Edgelow, head of energy banking at ATB Financial. “But the notion is that the principal is going to be standing in the hall wanting his passes back.”
Looking for the exit
Oil reserves are worth a lot less than they were a year ago. That has banks looking to renegotiate their loans in the energy sector. (REUTERS)
The investment bank Canaccord Genuity suggested that Canada’s banks are going to be looking to reduce their exposure to oil and gas loans by 15 to 20 per cent, simply because lending to energy has become too risky.
This has come as a shock to some juniors. The relationship between banker and corporate borrower tends to be pretty jolly when times are good, with money on tap for growth plans and parties during the Calgary Stampede. But when those loans become troubled, they are passed to another group, whose job it is to collect or otherwise get the debt off the books.
It’s a little less friendly.
“When you move files to the special loans teams, in most of the eastern banks, they are managed by the eastern-based special loans guys and their sole mandate is to get off the position,” said Edgelow. “Not necessarily to restructure and return it to health.”
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