More bad news from the oil patch. Oil prices have been at historic lows since the summer of 2014. Although prices have rebounded a bit, prices are still well below the $65 per barrel benchmark that most companies need to be profitable. In recent months approximately 50 exploration and production companies have filed for bankruptcy protection or shut down operations. (Oil field service businesses are in trouble too.) Banks see the handwriting on the wall and have reacted by constricting credit when oil companies most need it.
In many instances, banks are well within their rights to call nonperforming loans. If you are late or miss a payment, most commercial loan documents give all the power and remedies to the bank. We have seen some banks, however, call lines of credit even though there is no default.
Oil companies rely on lines of credit to pay bills and keep the lights on, especially when oil prices are temporarily depressed. By calling a line of credit, banks are forcing many oil companies to seek bankruptcy, find equity investors or simply shut their doors.
Whether or not a bank has the right to decline to renew a performing loan or call a line of credit depends on the loan documents. Although these documents are often drafted for the benefit of banks, banks don’t have unfettered discretion to call any loan simply because they are worried that they may lose money at some future date.
Banks aren’t just worried about their bottom lines. The Office of the Comptroller of the Currency has tightened the regulations for banks engaged in oil and gas lending.
The current climate sees some banks trying desperately to keep drillers afloat and avoid foreclosure. If they declare the loan at risk, the bank has higher reserve requirements. At the same time, banks know that if they foreclose, collecting full payment may not be possible. Banks feel they are better riding out the storm than collecting 50 cents on the dollar.
At the same time, other lenders have open lines of credit. They are equally desperate to make sure that their oil and gas borrowers don’t get any deeper in the hole. The problem is that they may legally be required to honor their lines of credit.
Layer on this mess a number of hedge fund companies and equity lenders who feel the time is right to wrestle control of struggling energy producers. Often these lenders have “equity kickers” that allow them to take control or ownership upon a default.
Caught in the middle of all these scenarios are the oil and gas companies. Like vultures circling a carcass, some banks and private equity firms are circling these struggling companies and waiting to make the kill. Unfortunately, when these energy companies can least afford to defend themselves, we have seen banks and lenders overreach.
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If you are the victim of bank misconduct, give us a call. We are a unique, national boutique of two lender liability law firms that have joined together to better help businesses victimized by bad banking practices.
Most lender liability law firms are defense oriented. That means they represent lenders and banks. We never represent banks. Our focus is on the borrowers. And unlike traditional lender liability lawyers that work for big firms (and charge ridiculous rates), we are boutiques where fees are reasonable and where our lawyers are experienced. Hybrid and alternative fees are often available.
Need more information? Contact attorney Chris Katers at [hidden email] or by telephone at (414) 777-0778. The author of this post, attorney Brian Mahany, can be reached at brian@mahanylaw or by phone at (414) 704-6731 (direct). Brian has extensive working experience directly in the oil and gas industry.
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