Oil Debt Blowout Will ‘Get a Lot Worse Before It Gets Better’ for Wall Street
March 4, 2016 (EIRNS)—American Banker’s March 4 article on the Wall Street banks’ energy losses begins, “It’s going to get a lot worse before it gets better for the industry’s oil lenders."
The American Bankers Association publication reports that the spikes in oil company bankruptcies are nothing yet:
"Cash-strapped oil companies have begun drawing down their revolving lines of credit, according to industry analysts. And that is a sign that a wave of energy-related bankruptcies is on the horizon.... They are drawing down credit with the goal of stockpiling extra cash, experts said. Reorganizing under Chapter 11 can be expensive, and having liquidity on hand can give a company a leg up in the process. Oil companies ‘are trying to fund the bankruptcy.”’
The publication adds that the Wall Street banks seem in denial on the shale debt blowout. JPMorgan Chase, to give just one example of several they cite, has extended $44 billion in credit lines to energy companies, but has funded only $14 billion of that. They quote an arrogant JPM Chase CEO Jamie Dimon: "‘They are not going to pull it down,’ Dimon said. ‘They don’t need it.’" Other big bank CEOs make the same claim, but clearly American Banker thinks they will be proven foolish.
JPMorgan Chase does have a report out about why it now anticipates $3-4 billion in losses in “energy” in the first six months of 2016. ”Default activity increased notably in February," the report says,
"as eight companies defaulted totaling $9.3bn in high-yield bonds and leveraged loans. This month’s activity marked the highest number of defaults since nine companies defaulted in August 2009."
Further, the bank acknowledges,
"Recovery rates in 2016 are extremely low. For high-yield bonds, the recovery rate YTD is 10.3% [i.e., only 10.3% of the defaulted debt has been recovered by liquidating the companies’ capital assets—ed.] which is well below the 25-year annual average of 41.4%. Final recovery rates in 2015 for [all] high-yield bonds were 25.2%, compared with recoveries of 48.1%, 52.7%, 53.2%, 48.6%, and 41.0% in full-years 2014, 2013, 2012, 2011, and 2010, respectively.... As for loans, recovery rates for first-lien loans thus far in 2016 are 24.5%, compared with their 18-year annual average of 67.2%."
These wholesale debt losses by Wall Street refer to "high-yield" or "junk" debt generally, not merely to shale or "energy" debt.