The Carlyle Group has closed on the new Carlyle Energy Mezzanine Opportunities Fund II. Carlyle raised $2.8 billion in this energy credit fund which is twice the size of the Energy Mezzanine Opportunities Fund I that raised $1.38 billion in 2012. The fund will provide capital to energy companies that have found it challenging to obtain capital from traditional sources. Multibillion dollar investments were made in the fund by some of the larger pension funds in the U.S.
Source: Carlyle closes second energy credit fund at $2.8 billion – Pensions & Investments
It’s becoming difficult to see how the lowest-rated U.S. junk bonds can continue to rally.They’ve posted their best performance since 2009, with more than a 30 percent return so far this year. And now investors from Goldman Sachs Asset Management to Highland Capital are starting to become nervous about this debt, and with good reason: If there’s any sort of economic shock at all, these notes are poised to lose a lot. And some sort of shock is entirely possible in the near future.
Source: 30% Junk Rally Gives Traders Heartburn – Bloomberg Gadfly
The worst may be yet to come for some strained oil services companies as $110 billion in debt, most of it junk rated, creeps closer to maturity.More than $21 billion of debt from oilfield services and drilling companies is estimated to be maturing in 2018, almost three times the total burden in 2017, according to a report from Moody’s Investors Service on Aug. 9. More than 70 percent of those high-yield bonds and term loans are rated Caa1 or lower, and more than 90 percent are rated below B1.Speculative-grade debt is becoming increasingly risky, as the default rate is expected to reach 5.1 percent in November, according to a separate Moody’s report. The 12-month global default rate rose to 4.7 percent in July, up from its long-term average of 4.2 percent, Moody’s wrote. Of the 102 defaults this year, 49 have come from the oil and gas sector, Moody’s noted.“While some companies will be able to delay refinancing until business conditions improve, for the lowest-rated entities, onerous interest payments and required capital expenditure will consume cash balances and challenge their ability to wait it out,” Morris Borenstein, an assistant vice president at Moody’s, said in the report.
Source: For Oil Companies $110 Billion Debt Wall Looms Over Next 5 Years – Bloomberg
Zions Bancorp, the parent company of Houston-based Amegy Bank of Texas, is coming off a first half of 2016 where it posted $73 million in losses on its energy loan portfolio, and expects more for the rest of the year, as well.The charge-offs were in line with what Salt Lake City-based Zion (Nasdaq: ZION) expected — a $125 million loss on its energy loan portfolio. The losses are largely tied to one sector: Since Sept. 30, 2014, 78 percent of Zions’ loan losses related to energy have been in oil field services, earnings documents show.
Source: Amegy parent Zions Bancorp closes first half with energy losses, more expected – Houston Business Journal
High-yield energy bonds, which have risen even as oil slid more than 20 percent in the past two months, may be hit if the commodity dips below the $40 it’s trading at now, according to Barclays Plc strategist Brad Rogoff.“That portion of the high-yield market especially, it looks a little rich with crude at $40,” a barrel, Rogoff, head of global credit strategy research at Barclays Capital, said Monday on Bloomberg TV. “If we drop below, you’ve probably got some downside there.”High-yield energy bonds are on track for their best returns since 2009, with oil recovering from a 13-year low of $26.21 a barrel in February. After rising to $51.23 in June, crude dipped back under $40 on Monday. With that drop, the correlation between speculative-grade bonds and the oil price is at its weakest level since at least 2010.
Source: Beware Junk Energy Bonds Amid Oil Slide, Barclays’s Rogoff Warns – Bloomberg
As oil prices surged toward $100 a barrel in 2010, Key Energy Services doubled down on horizontal drilling and began building heavy-duty service rigs. Four years later, the company had spent more than $1 billion on equipment and other capital investments as it rode the shale boom, piling up debt along the way.Then the market turned. Crude prices plunged, drillers fled oil fields, and Key’s cash flow evaporated. But the debt didn’t.Today, Key Energy is on the verge of bankruptcy, struggling under the weight of net debt – total debt minus available cash – that nearly tripled over the past decade to $760 million. Like many other energy firms, Key finds it nearly impossible to pay down loans it banked in days of plenty, now that prices have dipped below $50 a barrel.”The market caught Key off guard,” said Trey Whichard, Key’s former chief financial officer, “and it caught a lot of companies off guard.”Key Energy is an example of how oil and gas firms, supported by banks and other lenders, turned a boom into a bubble and why, now that it has burst, the energy industry faces a slow and painful recovery. Even if companies can avoid bankruptcy, the costs servicing heavy debt loads will tie up money that might otherwise be used to buy new equipment, launch new products, and hire new workers. A Houston Chronicle analysis of 130 publicly traded energy companies found that their combined net debt, a vital indicator of the health of a company, jumped sevenfold in a decade, ballooning from $60 billion in 2005 to $440 billion last year.”Something is going to have to give,” said Ed Hirs, an energy fellow in the University of Houston’s economics department and managing director for a small oil and gas exploration company on the Gulf Coast. “This is not a sustainable trend.”
Source: Heavy debt loads could slow energy’s recovery – Houston Chronicle
July 15 (Reuters) – Wells Fargo & Co reported a 3.5 percent fall in quarterly profit on Friday as it set aside more money to cover potential losses on new loans it made.The bank, the biggest U.S. mortgage lender, said its net income applicable to common shareholders fell to $5.2 billion in the second quarter, from $5.4 billion a year earlier.Earnings per share slipped to $1.01 from $1.03, matching the average analyst forecast, according to Thomson Reuters I/B/E/S. Revenue rose 4 percent to $22.2 billion.Although Wells’ results were generally in line with expectations, Oppenheimer analyst Chris Kotowski said they were “an indication of how difficult revenue growth is to come by.”Wells Fargo shares slipped 0.9 percent to $48.52 in premarket trading. Up to Thursday’s close, its stock had dropped about 10 percent since the start of the year, but Wells remained the most highly valued U.S. bank.Like JPMorgan Chase & Co on Thursday, Wells said it grew its loan book significantly during the second quarter, especially in commercial loans, auto loans and credit cards. Residential mortgage loans also grew, but revenue from that business fell.Wells Fargo’s $950.8 billion worth of average loans during the quarter was 9-percent above the year-ago and 3 percent higher than the prior period. It was the 16th consecutive quarter of loan growth for the San Francisco-based bank.But with that growth comes the need to boost reserves against loan losses that are possible in the future. The banking industry had been reducing reserves for years as credit conditions improved following the 2007-2009 crisis, but lenders are now building them again.Wells’ provisions for loan losses of $1.1 billion more than tripled from the year-ago quarter, and were 49-percent higher than the first quarter. The bank said its overall credit quality was “solid,” with the exception of its oil and gas portfolio, which has come under pressure due to the decline in energy prices.
Source: Wells Fargo profit drops as loan provisions rise
Wells Fargo took advantage of its Investor Day this week to rein in growth expectations and warn that more trouble lies ahead in the bank’s energy lending.”Expect continued stress in the oil and gas portfolio in 2016,” CFO John Shrewsberry said in his slide presentation to analysts. “More credit losses will be realized, and there is the potential for additional reserve builds.”
Reflecting the bank’s performance in recent quarters, Wells Fargo, led by Chairman and CEO John Stumpf, tempered growth expectations as the bank and its rivals continue coping with the low-rate environment that hurts the profitability of lending.
Wells (NYSE: WFC) expects return on equity over the next two years to range from 11 percent to 14 percent, down from a 12-to-15-percent range the bank shared with investors in 2014. The bank cut guidance on its return on assets to 1.1 percent to 1.4 percent, from 2014’s guidance of 1.3 percent to 1.6 percent.
Longtime industry observers are carefully following Wells Fargo’s energy woesto see how the bank weathers the storm, given the bank’s long-standing reputation for conservative lending and its diversified business model that has fueled the bank’s status as a powerful economic engine.
After several years of releasing money from credit reserves, Wells built its loan-loss reserves in the first quarter as stress among oil-and-gas borrowers offset continued improvement in consumer lending, particularly among residential mortgage borrowers, Shrewsberry said.
Wells cut credit lines to two-thirds of companies in the exploration and production business, which tends to be more vulnerable to plunging oil prices. The bank has reviewed almost half of its loan portfolio to this portion of the energy sector, according to Shrewsberry.
Wells Fargo’s total oil-and-gas exposure is $40.7 billion as of the first quarter, including untapped credit lines. That’s down $1.3 billion or 3 percent from last year’s fourth quarter due to cuts in existing credit lines and net charge-offs.
Source: Wells Fargo (NYSE: WFC) sees ‘continued stress’ in oil patch – Houston Business Journal
At its annual investor conference in San Francisco in May 2014, with oil trading at $102 a barrel, Wells Fargo & Co. boasted that in just two years it had almost doubled its energy exposure and seized the title of Wall Street’s top oil and gas banker.The timing couldn’t have been worse. Crude prices peaked a month later and have since plummeted to $40. Wells Fargo has downgraded 38 percent of its energy loans and set aside $1.2 billion to cover potential losses, according to company filings. The loans are coming under increasing scrutiny from regulators and investors, even though they make up only 2 percent of the bank’s portfolio.
Source: Wells Fargo Misjudged the Risks of Energy Financing – Bloomberg
Chesapeake Energy Corp. pledged almost all of its natural gas fields, real estate and derivatives contracts to maintain access to a $4 billion line of credit as the shale gas producer grapples with falling energy prices. The stock was the top performer in the Standard & Poor’s 500 Index.Chesapeake amended a secured revolving credit agreement that matures in 2019 with lenders, who agreed to postpone the next evaluation until June 2017, the Oklahoma City-based company said in a statement Monday. Such reassessments normally occur twice a year. In exchange, Chesapeake pledged “substantially all of the company’s assets, including mortgages encumbering 90 percent of all the company’s proved oil and gas properties” as collateral, according to a regulatory filing on Monday.
Source: Chesapeake Pledges Almost Entire Company as Debt Collateral – Bloomberg