After $31 Billion Fee Bonanza------Wall Street Gets Indigestion On Busted Energy Loans

By MATT WIRZ and GILLIAN TAN at The Wall Street Journal

Citigroup Inc.,Goldman Sachs Group Inc.,UBS AG and other large banks face tens of millions of dollars in losses on loans they made to energy companies last year, a sign of investor jitters in a sector battered by the oil slump.

The banks intended to sell the loans to investors but have struggled to unload them even after cutting prices, thanks to a nine-month-long plunge that has taken Nymex crude futures to their lowest level since 2009.

The losses mark a setback for Wall Street, after global banks earned $31 billion in fees over the past five years by financing energy-company stock sales, borrowing and mergers-and-acquisition transactions, according to Dealogic.

Wall Street’s losses on the loans could have a chilling effect on some oil companies’ ability to fund their operations as investors take a more cautious view of the sector.

“We’ve been pretty shy about dipping back into the energy names,” said Robert Cohen, a loan-portfolio manager at DoubleLine Capital who passed on some loans Citi was trying to sell. “We’re taking a wait-and-see attitude.”

Energy-sector deals have been a bright spot at a time when once-lucrative businesses, such as fixed-income trading and consumer lending, are flagging thanks to tighter rules, low interest rates and uneven economic growth, analysts said.

Investors say the energy bust doesn’t pose a great risk to the banks akin to 2007-2008, when they held hundreds of billions of dollars of souring mortgages and corporate loans.

“We often go through these periods,” said Sherif Hamid, vice president of high yield at AllianceBernstein LP, who helps oversee $35 billion of investments. “We saw it in Europe during the sovereign crisis where banks needed to sell at prices where buyers were willing to step in, even if it meant taking a loss, but it doesn’t mean the market is closed.”

At the same time, Wall Street hasn’t struggled to place so many corporate loans at once since credit markets seized up in 2007, when banks were stuck with more than $150 billion of so-called leveraged loans to companies with credit ratings below investment grade. Banking regulators have repeatedly sounded alarms about lax lending standards and are proposing to force banks to submit their loan portfolios more frequently for risk exams.

The losses show the danger banks face when unforeseen events, like the sharp drop in oil prices, create a chain reaction across an industry.

Investment banks helped fuel the oil-and-gas exploration boom of the past decade by making loans valued at about $1 trillion to companies in the energy industry, most of which they sold to investors.

The banks sold much of the debt to loan mutual funds, which grew rapidly from 2011 to 2013, but that demand dwindled as individual investors yanked $35 billion from the funds over the last 12 months, according to S&P Capital IQ LCD.

In June, Citigroup committed to a $1.3 billion loan backing an acquisition for Houston-based C&J Energy Services Inc. When Citi tried to sell the loan in November with Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co., investors balked.

The banks held off for several months, hoping that oil prices would rebound. Instead, Nymex crude prices hit a fresh low this week. A spokesman for C&J declined to comment.

When oil prices dropped further in March, the banks decided to cut their losses and approached hedge funds that specialize in distressed debt about buying a smaller $1.05 billion loan, people familiar with the matter said. The banks offered the C&J loan at about 85 cents on the dollar this week.

If they sell the entire loan at that price, they will raise about $893 million, leaving a funding gap of $157 million.

About half of the shortfall would be offset by fees and wiggle room the banks prenegotiated with C&J, leaving the banks with a loss of about $80 million, said people familiar with the matter.

“We saw this in 2008,” said Frank Ossino, a loan-fund manager at Newfleet Asset Management. “The clearing price is between where investors value the loans and where banks are willing to take the loss.”

The loans that haven’t been sold could yet recover value if the market turns around.

Most of the loans that banks are struggling to sell funded acquisitions of companies that provide services to oil producers and are the first to see revenue decline when drilling slows.

C&J provides equipment for hydraulic fracturing, or fracking, and used its loan to help pay for the purchase of a similar business from Nabors Industries Ltd.

Houston-based Express Energy Services borrowed $220 million in October from a group of banks led by UBS and Goldman Sachs to pay for a so-called leveraged buyout by Apollo Global Management LLC.

The banks tried selling the loan several times before unloading it this week at a price below 65 cents on the dollar, taking a roughly $66 million loss, said a person familiar with the matter.

In February, a $480 million loan also arranged by Goldman and UBS for Scotland-based Proserv Group was sold at a price under 80 cents on the dollar after attempts to syndicate the deal in December failed, saddling the banks with about $75 million of losses.

Cracks also are starting to show in loans to companies that produce oil and gas. Banks led by Morgan Stanley have been trying since December to distribute an $850 million loan backing Vine Oil & Gas LP and Blackstone Group LP’s joint purchase of natural-gas assets and are now marketing the deal at a steep discount, investors say.

While large banks initially flouted the pressure from regulators, they have started to fall in line.

Leveraged lending guidance from regulators “now stands in the way of a return to precrisis conditions,” Federal Reserve Governor Jerome Powell said during a speech in New York last month.

Banks Struggle to Unload Oil Loans - WSJ.

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