Canadian banks ease credit rules for energy companies to stave off defaults, bankruptcies

Obsidian Energy

16/04/2020 11:00

By Nichola Saminather and Jeff Lewis
    TORONTO, April 16 (Reuters) - Canadian banks are beginning
to relax lending standards for energy firms struggling to
operate with oil prices at half the level needed to cover costs,
seeking to keep them afloat until the industry recovers from its
deepest slump ever.
    Banks are extending credit and waiving covenants for some
energy companies to avoid forcing defaults and bankruptcies that
leave the lenders holding assets, in contrast to some U.S.
counterparts preparing to seize oil and gas fields.  urn:newsml:reuters.com:*:nL2N2BX2ZI
    A 2019 Canadian Supreme Court ruling requiring bankrupt oil
companies to prioritize clean-up of inactive wells over paying
creditors is also an incentive, analysts said.  urn:newsml:reuters.com:*:nL1N1ZV0ZB
    While the measures would help stem banks' loan losses during
a difficult year, a slower-than-expected recovery or oil prices
consolidating at lower levels could lead to more soured loans
longer term in an already challenged portfolio.  urn:newsml:reuters.com:*:nL4N2BG59Q
 urn:newsml:reuters.com:*:nL1N2B30RO
    By renegotiating credit agreements, banks don't have to
consider the loans impaired, "but the concern is that maybe
they’re just kicking the can down the road," said Brian Madden,
portfolio manager at Goodreid Investment Counsel. 
    Obsidian Energy  OBE.TO , Pembina Pipeline Corp  PPL.TO  and
Baytex Energy  BTE.TO  are among the companies that have
obtained or extended credit facilities from their lenders
recently.
    But Obsidian's lenders - including ATB Financial, BMO
 BMO.TO , Canadian Imperial Bank of Commerce  CIBC.TO  and
National Bank of Canada  NA.TO , according to Refinitiv data -
waived debt-to-adjusted EBITDA covenants while renewing https://www.obsidianenergy.com/press-releases/obsidian-energy-announces-completion-of-agreements-with-our-banking-syndicate-noteholders-and-landlord
 its credit facility, despite debt of C$461 million at 2019 end,
up 10% from the prior year. 
    Bonavista Energy Corp  BNP.TO  in March got approval under a
temporary waiver to tap its credit line for a reduced amount
after a CIBC-led banking syndicate rejected an earlier drawdown
request.
    Still, the majority of banks' energy loans are to larger
diversified companies and lenders are not relaxing requirements
across the board. 
    Calgary-based Delphi Energy Corp  DEE.TO  on Tuesday sought
creditor protection after a syndicate of banks, including ATB
Financial, Bank of Montreal  BMO.TO  and Bank of Nova Scotia
 BNS.TO , balked at waiving a debt covenant.
    
    REDUCED LENDING
    Banks could lower lending amounts as they recalculate energy
companies' borrowing bases through to May, the total collateral
against which they can lend.
    Royal Bank of Canada  RY.TO  analysts said in a Wednesday
note they wouldn't be surprised to see between 20-40% drop in
borrowing bases on average, though it could be more case
specific.
    Those reviews are playing out as Ottawa considers ways to
backstop banks to keep them lending to energy companies, Reuters
reported.  urn:newsml:reuters.com:*:nL1N2BH0TT
    For banks, standing by their clients, who are also a source
of non-lending revenues, is the best strategy for now.
    CIBC is providing new credit lines, helping companies
restructure where needed and "is ensuring they have the
financial strength to deal with this very unique challenge," CEO
Victor Dodig told Reuters.
    U.S crude has slumped almost 70% since January to less than
$20 a barrel despite an agreement over the weekend between Saudi
Arabia and Russia to slash production. Although highly variable,
the majority of the Canadian industry needs oil prices above $40
to maintain volumes and cover costs, according to RBC.
    Oil producers have responded by cutting spending and laying
off workers.  urn:newsml:reuters.com:*:nL1N28S1XC
    Toronto-Dominion Bank  TD.TO  expects stresses in the
industry if prices fail to recover, but the bank continues to
"be there for them," CEO Bharat Masrani told reporters this
month.
    Scotiabank declined comment. BMO did not offer an immediate
comment.
    ARC Financial, Canada’s largest energy-focused private
equity manager, screened 140 oil producers in February, and
found two-thirds were already insolvent.  
    Larger, more diversified companies are seen as better able
to survive the current crisis, and banks are continuing to
provide liquidity to them, RBC CEO Dave McKay told media last
week. 
    But some analysts expect even the bigger companies to face
pressure if prices stay soft for long.
    Barclays analyst John Aiken said that, while he's not overly
concerned about banks now, "even if we’re not seeing any cracks
being formed, the outlook is more negative, and banks are going
to be required to put up more reserves against these loans."

 (Reporting By Nichola Saminather and Jeff Lewis in Toronto;
Additional reporting by Rod Nickel
Editing by Denny Thomas and Nick Zieminski)
 ((Nichola.Saminather@thomsonreuters.com; +1-416-687-7604;
Jeff.Lewis@thomsonreuters.com; +1-416-687-7723))