By Mari Salazar, SVP, Manager, Energy Banking and Cameron Reed -VP, Loan Syndication Consultant,
BOK Financial
Mari Salazar, SVP, Manager, Energy Banking
It’s a whole new world for energy banking. The universe of dedicated energy lenders has declined over the past decade, and lenders are settling into the new energy banking landscape. Some 20 years ago there were more than 70 energy banks. Now we are looking at a group of fewer than 50 lenders who will lend in the energy market. Of those 50 institutions, there is a great divide. Smaller lenders do not want to be an insignificant percentage of a large multi-bank credit facility, and the large banks money-center institutions have shifted focus to upsized transactions with capital markets opportunities. There is a gap in the market for lenders who are willing to support companies from inception through the growing pains of early development. The reality is, there are closer to 20 regional lenders that have the appetite and ability to play in the true middle-market energy lending space. Those companies are often private equity or family office backed and have no desire to ever go public with a high-paced development schedule. This requires partner banks to have a deep technical bench as well as ability to evaluate engineering and potentially size the loan multiple times a year to keep pace with development. This shift in the energy lending market has provided regional and super-regional lenders the opportunity to step-in to provide financing solutions for the middle market energy space.
There might be a Natural RBL Cap
Cameron Reed, VP Loan Syndication Consultant
What does this mean? With the many regional and foreign banks exiting the space entirely and larger money-center banks focusing upmarket, and with smaller institutions unwilling to participate in multi-bank credit facilities, there seems to be a natural cap in the First Lien Senior Secured reserve-based loan (“RBL”) market.
Large energy syndications can be challenging given the shrinking universe of lenders in the space. For middle-market RBL transactions, loans reaching $1.0B-$1.5B are tapping into most of the available bank capital.
The lenders who have weathered the storm benefit from both the attractive economics and conservative credit culture in the energy banking sector. Ancillary business as well as economics contribute to lending decisions now more than ever. While the energy banking sector has held the line on tighter credit structure and attractive spreads, it has not been enough to entice significant reentry to the space.
Syndicators have to rely on creative solutions in order to subscribe transactions that are reaching this $1.0B size.
Tapping into the community bank space, albeit limited, can help fill smaller financing gaps. Many of these community banks have extensive technical knowledge of the space but are limited by commitment size. Invitations to widely-syndicated deals also provides these lenders an opportunity to bank companies that service their communities—whether it be in West Texas or North Dakota.
The Pressures of Energy Banking
It is easy to just focus on commodity prices when describing the appetite of the energy banking space. While an elongated downturn forced many regional and foreign banks to flee the space after incurring significant losses or just wanting to reduce exposure to the energy industry, there was another undercurrent spinning that would also impact energy banking, the cost of capital.
With increasing bank capital requirements and interest rates, the cost of doing business has changed. RBL structures and credit risk all factor into how banks allocate capital. The higher the identified risk of a loan, the more capital an institution must reserve, making that transaction more expensive. Economics contribute to lending decisions now more than ever.
The return to relationship banking
Over the last decade, energy banking has seen a dramatic shift. Bank consolidation kickstarted this shift, followed by a prolonged commodity downturn, pressure on fossil fuel lending, and overall economic pressures. With limited capital to allocate, the approximately 50 banks remaining in the space are committed to energy lending and to defining how and why capital is deployed.
Banks focus on the length and depth of their relationship with a client. Ancillary products and services are not just a way to improve a bank’s economics, they also represent a lender’s seat at the proverbial “syndication table.”
While credit metrics remain a top priority for lenders as borrowers face the higher interest rate environment, personal relationships with management is now paramount for decision makers within these institutions.
We have seen a return to relationship banking and it is more important than ever for management teams and sponsors to also stay in front of bankers.