Blimey

British banks including Royal Bank of Scotland and Barclays may be sitting on billions in losses from the collapse in oil prices after a surge in junk loans to the industry.

Terrible…..

According to Dealogic’s data, RBS has arranged $14.3bn of leveraged oil and gas loans in the past four years, making it the biggest UK player in the high-yield space.

This compares to $10.5bn for Barclays and $4.7bn for HSBC, but is far less than the biggest Wall Street players. Wells Fargo and JP Morgan have both been bookrunners on almost $100bn since the start of 2011

That’s lots.

“Someone is feeling the pain,” said Mr Barua. “When you see [this much] high-yield issuance in a sector that has been levering up across the supply chain, any shocks in the underlying business will have risk ripples across the financial system.”

Umm, wait a minute. “Issuance”? You mean bonds? Or at least something that is syndicated? The banks have only arranged these loans, not made them?

So the losses aren’t in the banks then, are they?

Doesn’t the Telegraph know the difference?

11 thoughts on “Blimey”

  1. Well, underwriting a bond issue isn’t quite the same as syndicating a loan: the bank has to at least temporarily take on the risk. You would expect they would have got rid of nearly all of it after a few weeks, though. HY bonds don’t have any magic that makes them look low-risk, they’re taking up balance sheet that is needed for other business.

  2. Sounds like the spread betting / margin trading companies. Every single trade is supposed to be hedged, yet several of them went bust after the Swissie peg was removed.

    I expect the banks still have some Oil & Gas loans on their books, but I’d be surprised if it was even 1% of the amounts quoted.

  3. Unsurprising that a newspaper should fuck this up, but there are some seriously distressed oil companies out there which, if they collapse, will likely take a bank or two with them. If Tullow comes through this downturn still intact it will be a miracle, but there are larger companies that are looking wobbly. Total is having to borrow money to pay the dividend, hoping against hope that these “low” prices are temporary. They’ve promised their investors they will continue to pay the dividend in order to stave off a collapse in the share price: the dividend is the only reason anyone would bother owning Total stock. So they’ve gone off to the banks – probably BNP, Soc Gen, and the other French banks and borrowed cash to pay it. Short of a proper strategy, the CEOs of Total and Eni have taken instead to berating the Saudis for not intervening to keep the oil price artificially high.

    As I argue in the linked article, I think the oil industry has changed to the point a GM-style collapse of a major oil company (including the ill-advised political rescue with taxpayer money) is on the cards in the next 10 years. Like generals fighting the last war, a lot of oil companies think they’re operating in an environment that is fast disappearing. If one or two of the larger oil companies collapse, you can expect several banks and a few hundred thousand pensioners to get hit pretty hard.

  4. Oilfield Expat – Thanks for the insights. I don’t understand one point: why on earth would the banks lend them money to make dividend payments? The standard definition of a banker is someone who lends you an umbrella when the sun is shining, and takes it back at the first sign of rain. Or are they in too deep themselves?

  5. Andrew M,

    I think it’s a combination of:

    1) delusion that this downturn is a temporary blip, and there are no structural issues within the company
    2) there is enough family silver to keep selling for the company to raise cash
    3) a cosy relationship between the French banks and French companies which, no doubt due to decades of political pressure and meddling, means the normal due diligence goes out the window.

    But yes, it is ludicrous to borrow money from a bank to pay cash dividends to investors, and it’s difficult to see what value the company is adding in this transaction.

  6. I think that this is the point where people start demanding the return of the Corn Laws, except you know, for oil.

  7. right now I’m working in a related area and I agree with OE completely – right now there are companies just about profitable, companies making a loss but with reserves and companies making a loss with little/no money in the bank. The longer this goes on, the more companies fall into the third category and the bigger they become. I’m aware of several companies in negotiations with lenders about their debts and right now the questions are whether or not to prop them up, what happens if they go bust and how big a write-off the banks take.

    The industry has suddenly gone from riding along on the crest of $100+ $/barrel to teetering on the verge of bankruptcy; pain is spreading to both lending banks and bond holders, and is being smeared into the supply chain as much as possible. I was told that one very large oil co told one of its major suppliers that it would have a 25% discount on the current work (told, not asked) oh and by the way it would be paying in 18 months.

    Aberdeen has had the largest property bubble outside London and is suddenly all too visible proof of Buffets adage – the tide has gone out and many people have no trunks on. Certainly expect small and medium companies to go pop soon if the banks can’t renegotiate their debt. Not too sure if OE’s prediction of a major going down will hold true, but I reckon there’ll be large scale mergers and acquisitions within the year if this keeps up

  8. Pingback: Convergence | The Oilfield Expat

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