By Matt Wirz And Gillian Tan
Citigroup Inc., Goldman Sachs Group Inc., UBS AG and other large
banks face tens of millions of dollars in losses on loans they made
to energy companies last year, a sign of investor jitters in a
sector battered by the oil slump.
The banks intended to sell the loans to investors but have
struggled to unload them even after cutting prices, thanks to a
nine-month-long plunge that has taken Nymex crude futures to their
lowest level since 2009.
The losses mark a setback for Wall Street, after global banks
earned $31 billion in fees over the past five years by financing
energy-company stock sales, borrowing and mergers-and-acquisition
transactions, according to Dealogic.
Wall Street's losses on the loans could have a chilling effect
on some oil companies' ability to fund their operations as
investors take a more cautious view of the sector.
"We've been pretty shy about dipping back into the energy
names," said Robert Cohen, a loan-portfolio manager at DoubleLine
Capital who passed on some loans Citi was trying to sell. "We're
taking a wait-and-see attitude."
Energy-sector deals have been a bright spot at a time when
once-lucrative businesses, such as fixed-income trading and
consumer lending, are flagging thanks to tighter rules, low
interest rates and uneven economic growth, analysts said.
Investors say the energy bust doesn't pose a great risk to the
banks akin to 2007-2008, when they held hundreds of billions of
dollars of souring mortgages and corporate loans.
"We often go through these periods," said Sherif Hamid, vice
president of high yield at AllianceBernstein LP, who helps oversee
$35 billion of investments. "We saw it in Europe during the
sovereign crisis where banks needed to sell at prices where buyers
were willing to step in, even if it meant taking a loss, but it
doesn't mean the market is closed."
At the same time, Wall Street hasn't struggled to place so many
corporate loans at once since credit markets seized up in 2007,
when banks were stuck with more than $150 billion of so-called
leveraged loans to companies with credit ratings below investment
grade. Banking regulators have repeatedly sounded alarms about lax
lending standards and are proposing to force banks to submit their
loan portfolios more frequently for risk exams.
The losses show the danger banks face when unforeseen events,
like the sharp drop in oil prices, create a chain reaction across
an industry.
Investment banks helped fuel the oil-and-gas exploration boom of
the past decade by making loans valued at about $1 trillion to
companies in the energy industry, most of which they sold to
investors.
The banks sold much of the debt to loan mutual funds, which grew
rapidly from 2011 to 2013, but that demand dwindled as individual
investors yanked $35 billion from the funds over the last 12
months, according to S&P Capital IQ LCD.
In June, Citigroup committed to a $1.3 billion loan backing an
acquisition for Houston-based C&J Energy Services Inc. When
Citi tried to sell the loan in November with Bank of America Corp.,
J.P. Morgan Chase & Co. and Wells Fargo & Co., investors
balked.
The banks held off for several months, hoping that oil prices
would rebound. Instead, Nymex crude prices hit a fresh low this
week. A spokesman for C&J declined to comment.
When oil prices dropped further in March, the banks decided to
cut their losses and approached hedge funds that specialize in
distressed debt about buying a smaller $1.05 billion loan, people
familiar with the matter said. The banks offered the C&J loan
at about 85 cents on the dollar this week.
If they sell the entire loan at that price, they will raise
about $893 million, leaving a funding gap of $157 million.
About half of the shortfall would be offset by fees and wiggle
room the banks prenegotiated with C&J, leaving the banks with a
loss of about $80 million, said people familiar with the
matter.
"We saw this in 2008," said Frank Ossino, a loan-fund manager at
Newfleet Asset Management. "The clearing price is between where
investors value the loans and where banks are willing to take the
loss."
The loans that haven't been sold could yet recover value if the
market turns around.
Most of the loans that banks are struggling to sell funded
acquisitions of companies that provide services to oil producers
and are the first to see revenue decline when drilling slows.
C&J provides equipment for hydraulic fracturing, or
fracking, and used its loan to help pay for the purchase of a
similar business from Nabors Industries Ltd.
Houston-based Express Energy Services borrowed $220 million in
October from a group of banks led by UBS and Goldman Sachs to pay
for a so-called leveraged buyout by Apollo Global Management
LLC.
The banks tried selling the loan several times before unloading
it this week at a price below 65 cents on the dollar, taking a
roughly $66 million loss, said a person familiar with the
matter.
In February, a $480 million loan also arranged by Goldman and
UBS for Scotland-based Proserv Group was sold at a price under 80
cents on the dollar after attempts to syndicate the deal in
December failed, saddling the banks with about $75 million of
losses.
Cracks also are starting to show in loans to companies that
produce oil and gas. Banks led by Morgan Stanley have been trying
since December to distribute an $850 million loan backing Vine Oil
& Gas LP and Blackstone Group LP's joint purchase of
natural-gas assets and are now marketing the deal at a steep
discount, investors say.
While large banks initially flouted the pressure from
regulators, they have started to fall in line.
Leveraged lending guidance from regulators "now stands in the
way of a return to precrisis conditions," Federal Reserve Governor
Jerome Powell said during a speech in New York last month.
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