Junk bonds could keep US oil and gas producers out of bankruptcy this year as commercial banks continue to limit loans to cash strapped firms, a top corporate lawyer told the Argus Live Crude conference today.
Producers are getting more access to junk bonds, which essentially offer high interest financing to borrowers because they are more likely to default than investment grade companies, said Kirkland and Ellis law firm partner Mary Kogut Brawley, a debt finance specialist based in Washington, DC. Historically this form of financing has been closed to oil and gas producers but that started to change in the fall of 2020.
"Any opening of the high yield market opens up a lot of opportunity" for producers facing deadlines to pay back their current loans, Brawley said.
When the Covid-19 pandemic struck nearly a year ago, energy demand plummeted. Combined with the Opec+ price/production disagreement, crude prices fell sharply. Faced with heavy losses and falling reserves values, banks and investors became even less willing to lend money to producers.
Without access to capital producers have sought bankruptcy protection or other financing options. In 2020, 46 exploration and production companies with $53.1bn in total debt filed for Chapter 11, the highest number since 2016 when 70 producers sought bankruptcy protection.
Despite commodity prices recovering from 2020 lows and Covid-19 vaccination roll-outs promising further recovery, Brawley said producers still face a tough time getting banks to lend them capital backed by their oil and gas reserves. Even producers with the strongest balance sheets have only been able to preserve their current levels of reserve based loans.
"It is extremely, extremely difficult for companies to have an increase in their lending base," she said.
The good news that companies entering Chapter 11 bankruptcies have found is banks willing to finance their restructurings. Helping producers restructure loans is the best option available to banks because they do not want to own the companies, and asset sales will not yield sufficient value in today's slow acquisitions market, Brawley said.
Still, Brawley said she is "cautiously optimistic" the industry will see more consolidation this year through mergers and acquisitions. Producers exiting bankruptcy carry a lot less debt, which makes them attractive candidates for a potential buyer.
Rebounding crude prices help too.
Right now, a WTI price of $47-$50/bl "seems to be the a sweet spot to get deals done," Brawley said.
