Energy Credit Alternatives: The ‘Shadow’ Banks

Get ready. The RBL redetermination season that comes around every fall is fast approaching, but it could be more fraught than usual this year. Many E&P companies find themselves painted into a corner: They are fully drawn, or worse, overdrawn, on their revolving credit lines—just when the value of their reserves (collateral) has declined. Worse, their traditional bankers may not be apt to help, as many have pulled back from the space.

“The COVID-19 pandemic only accelerated what was already a challenged market in 2020. I think a lot of the ‘fringy-ier’ banks are getting out of energy, but just about everyone is trying to reduce their exposure,” said one alternative debt provider. “Some banks find that the risks turned out to be bigger than they thought, and they are trying to consolidate or wind down their portfolio, and some are saying, ‘Get me out of energy; I don’t care what it takes.’”

What does it take? The natural buyer of a loan would be another bank or an investor with a higher hurdle rate and a long-term view. In any case, big discounts would be needed to attract a buyer.