Canadian Bank’s Loan Exposure to Energy (and a survival plan for energy companies)
The essence of the article is that the banks are beginning to amend loan covenants to provide default relief primarily because they do not want the assets when used equipment valuations are severely depressed. Amend and extend.
A separate article, in the same Brief however, quotes Versa Capital Management: “We are at the very beginning of the next wave of energy defaults.” Bankruptcies are projected to explode.
One might argue that expecting more bankruptcies is not entirely consistent with a senior lender amend and extend trend. But our view is that in certain markets, such as Canada, both will continue to happen.
Energy companies will seek bankruptcy protection with the support of their secured creditors. They will retain a great deal of the equipment and restructure their unsecured creditors, including suppliers, sub contractors and lease obligations.
Why? Because sustained lower oil prices necessitate a structural change in the Canadian energy sector: lower service costs, lower labour costs, lower real estate costs.
Lend and extend won’t solve the structural issues but bankruptcy will.
Range Advisors has been very active in the energy sector assisting companies facing these difficult challenges, including cash flow management, financial restructuring, M&A and surplus asset disposition (for which there is an active international market).
Posted by Scott Sinclair, Managing Director, Range Advisors
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