By Emily Glazer, Ryan Tracy and Rachel Louise Ensign
Banks are clashing with regulators over loan reviews that could
crimp the flow of new credit to the oil patch.
The dispute is focused on the relatively narrow issue of loans
secured by oil and gas companies' reserves, but it highlights the
much broader point of how postcrisis regulation of the financial
industry is affecting sectors far from Wall Street.
On one side are the bankers who have been grappling with the
plunge in oil prices and the need to shore up billions of dollars
in credit extended to the energy industry. On the other are
regulators eager to prevent another financial crisis while not
knowing what it might be.
Caught in the middle are the small- and medium-size exploration
and production companies that rely on credit lines that use their
energy reserves as collateral. Banks are now beginning their fall
reviews of the quality of that collateral and worry regulators
could ding them for making loans the banks think are prudent.
"We're concerned about it," said Matt McCaroll, chief executive of
Houston-based Fieldwood Energy LLC. "These are challenging times
for our business...and to have additional pressure on the
relationship between borrower and lender is going to be very
problematic."
The oil and gas exploration company has about $1.75 billion of
reserve-based loans with 23 banks. Mr. McCaroll said he has voiced
his concerns with congressmen.
The issue came to a head this month when a dozen regulators from
the Office of the Comptroller of the Currency, Federal Reserve and
Federal Deposit Insurance Corp. flew to Houston to meet with about
40 energy bankers from J.P. Morgan Chase & Co., Wells Fargo
& Co., Bank of America Corp., Citigroup Inc. and Royal Bank of
Canada. In the spring and fall, regulators conduct a review of
large corporate loans shared by multiple banks.
Several industry officials said the meeting, held at Wells
Fargo's offices in downtown Houston, was the first of its kind. The
bankers and regulators sat around tables in a large room with a
screen displaying the OCC's agenda that largely focused on
examining and rating the loans, people familiar with the meeting
said.
The banks were concerned because a review of their loans by
regulators this spring left many reserve-based loans rated as
riskier than the banks had considered them to be. They spent much
of the meeting explaining why reserve-based loans are similar to
lower-risk, asset-based loans, some of these people said. The
bankers also questioned why the OCC considers an energy company's
total debt when assessing reserve-based loans, which generally get
paid off ahead of other debt in the event of a restructuring.
"We disagree with the regulators," said Francis Creighton,
executive vice president of government affairs at the Financial
Services Roundtable, an industry trade group. "These are good
loans, they have a history of performing...we think their analysis
is incorrect on this."
So far, the regulators' approach is winning out. Those biggest
U.S. banks, Comerica Inc. and Capital One Financial Corp.
collectively filed a record number of appeals to the spring review,
arguing that reserve-based loans have a long history of low default
rates. Late this summer, most of those appeals were rejected,
according to people familiar with the matter. Some banks had all of
their appeals denied, the people said.
The regulators didn't make any concessions at the meeting in
Houston, which was described by several participants as a
fact-finding mission.
Regulators declined to discuss specific conversations with
banks. The OCC has said it is concerned about energy lending
exposure. In a June report on lending risks, it said OCC examiners
would be focused on "banks' actions to assess, monitor, and manage
both direct and indirect exposures to the oil and gas sector, given
the recent decline in oil prices and the potential for a protracted
period of low or volatile prices."
Oil prices fell below $40 a barrel last month for the first time
since the financial crisis. On Wednesday, oil for November delivery
dropped $1.88, or 4.1%, to $44.48, on the New York Mercantile
Exchange and has declined 52% in the past year. Previous energy
busts, like the one in the 1980s, have resulted in major losses at
banks, with painful ripples through the broader economy.
The OCC regulates the national-bank units that make many of the
energy loans at big firms like J.P. Morgan, Wells Fargo, Bank of
America and Citigroup. It reviewed energy loans at about 10 banks
it oversees in 2013 and 2014 but didn't find any significant
problems at that time, according to a person familiar with the
matter.
Yet in a semiannual report on emerging risks published in June,
the OCC said the "significant decline in oil prices in 2014 could
put pressure on loan portfolios" going forward.
Any pressure from regulators will only amplify the cuts to
borrowing already affecting the small- and medium-size energy
companies. They are the producers that have helped sharply boost
U.S. oil output in recent years, helping create the supply glut
that is now weighing on prices.
According to a recent Citigroup report, banks will reduce the
amount of money they could lend to energy firms by as much as 15%.
If banks were to make cuts of that magnitude, some $10 billion of
credit could dry up, according to a Wall Street Journal analysis of
securities filings by 75 exploration and production companies.
"It all flows downhill," said Steve Moss, a bank analyst at
Evercore ISI. "If the regulators are going to be tougher on the
banks, expect the banks to be tougher on the borrowers."
San Antonio-based Cullen/Frost Bankers Inc. recently cut a
number of customers' borrowing capacity as energy prices fell,
reducing the value of their reserves as collateral.
"It comes down to a basic in lending," Chief Executive Dick
Evans said. About 15% of his bank's loans are energy related, one
of the highest levels among banks. He said he couldn't forecast how
tougher regulatory scrutiny might affect the industry.
"We just have to live through this," he said.
Write to Emily Glazer at emily.glazer@wsj.com, Ryan Tracy at
ryan.tracy@wsj.com and Rachel Louise Ensign at
rachel.ensign@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
September 23, 2015 19:36 ET (23:36 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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