As distressed oil-and-gas-related loans continue to mount, the markets’ attention is turning to loan commitments that banks have not yet funded. According to a recent Wall Street Journal article, ten large U.S. banks have disclosed $147 billion in unfunded loan commitments that oil and gas companies can draw upon, though the banks are expected to reduce energy credit lines secured by proven reserves by more than 30% this spring. Smaller and international banks hold more of these unfunded commitments worth billions of dollars. Market observers note that energy companies may be tempted to draw on these lines as they grow increasingly distressed. According to the WSJ article, “a handful of energy borrowers announced more than $3 billion of drawdowns against these types of loans” in the first quarter of this year. Although banks historically have not disclosed these commitments, they have begun doing so recently, with oil and gas prices in a sustained decline.
The decline in energy prices has led to a steady stream of news reports about the deteriorating quality of energy-related loans and the increase in potential losses that banks face from their exposure to the energy sector. For instance, recent reports have revealed that some large banks, including Wells Fargo and Comerica, are likely to find more than 50% of their energy-related loans in danger of default this year. Numerous banks have reported increases in reserves set aside for energy loan losses. In addition, a recent Fed survey of banks revealed negative spillover effects in business and household loans – including commercial real estate, automobiles, and credit cards – made in regions dependent on the energy sector.
Although oil prices have been in a slump for well over a year, the number of energy (and related) loans entering the distressed category appears to be picking up rapidly in 2016. Just last week, JP Morgan announced that the value of “criticized” loans to the energy sector had more than doubled – from $4.5 billion to $9.7 billion – in the first quarter. We will continue to monitor and post on new developments as they occur.