Wednesday, March 25, 2015

storm clouds approaching...


Oilprice.com | Oil companies continue to get burned by low oil prices, but the pain is bleeding over into the financial industry. Major banks are suffering huge losses from both directly backing some struggling oil companies, but also from buying high-yield debt that is now going sour.
The Wall Street Journal reported that tens of millions of dollars have gone up in smoke on loans made to the energy industry by Citigroup, Goldman Sachs, and UBS. Loans issued to oil and gas companies have looked increasingly unappetizing, making it difficult for the banks to sell them on the market.
To make matters worse, much of the credit issued by the big banks have been tied to oil field services firms, rather than drillers themselves – companies that provide equipment, housing, well completions, trucks, and much more. These companies sprung up during the boom, but they are the first to feel the pain when drilling activity cuts back. With those firms running out of cash to pay back lenders, Wall Street is having a lot of trouble getting rid of its pile of bad loans.
Robert Cohen, a loan-portfolio manager at DoubleLine Capital, told the Wall Street Journal that he declined to purchase energy loans from Citibank. “We’ve been pretty shy about dipping back into the energy names,” he said. “We’re taking a wait-and-see attitude.”
But some big investors jumped back into the high-yield debt markets in February as it appeared that oil prices stabilized and were even rebounding. However, since March 4 when oil prices began to fall again, an estimated $7 billion in high-yield debt from distressed energy companies was wiped out, according to Bloomberg.
The high-yield debt market is being overrun by the energy industry. High-yield energy debt has swelled from just $65.6 billion in 2007 up to $201 billion today. That is a result of shaky drillers turning to debt markets more and more to stay afloat, as well as once-stable companies getting downgraded into junk territory. Yields on junk energy debt have hit 7.44 percent over government bonds, more than double the rate from June 2014.