The recent rally in the price of oil is doing little to improve the prospects of overstretched borrowers in the oil patch, say banks and their advisers, raising the prospect of further pain for companies and their lenders in the months ahead. Trouble in the energy sector was one of the themes of the first quarter for the big US banks, where provisions for loan losses leapt an average 61 per cent from the same period a year earlier, according to DBRS, the credit rating agency. Now, with many banks deep into the twice-annual process of resetting borrowing limits for their energy customers, they say they are cutting facilities by between 20 and 25 per cent — a deeper contraction than the 15 to 20 per cent cuts in the second half of last year.
The squeeze comes despite a recovery in the price of oil, which has risen more than 60 per cent from its February lows. It is likely to mean that more cash-strapped borrowers tip into bankruptcy. “At the margin, the higher spot price has helped, but it has definitely not fixed companies with too much leverage in their capital structure,” said one senior Texas-based banker, speaking on condition of anonymity. Another banker at a rival bank noted that, unlike late last year, most customers no longer had the option of refinancing via equity markets or high-yield bond markets. “It’s a little trickier this spring,” he said. “The market is running out of places to go for money.” April was the heaviest month for energy company bankruptcies since the oil price started to turn in late 2014, according to Haynes and Boone, a Dallas-based law firm. Eleven companies filed for Chapter 11 protection during the month with total debts of $14.9bn — a significant increase from March, which saw seven collapses with total debts of $1.9bn.