December 4, 2014 / 8:06 PM / 5 years ago

TRLPC-Loan costs rise for leveraged US energy companies

NEW YORK, Dec 4 (Reuters) - Slumping oil prices are boosting borrowing costs for energy companies in the US leveraged loan market as banks and investors assess the implications of the precipitous drop in the oil price, which is hitting secondary loan and bond prices.

The drop in Brent crude oil prices to below $70 from $100 in September is making it difficult and more expensive for energy companies to raise new leveraged loans and some oil and gas firms could struggle to meet covenants on existing loans, bankers said.

Gas and oil extraction company Atlas Energy LP postponed a $155 million opportunistic refinancing due to market conditions which it may revisit if the market improve, bankers said.

Vine Oil & Gas, a Dallas-based exploration and production company, offered a high spread and deep discount on an $850 million financing that backs the $1.2 billion acquisition of shale assets in the Haynesville area from Royal Dutch Shell Plc when the deal launched last week.

The deal consists of a $500 million, seven-year term loan at 675-700 basis points (bps) and a $350 million, 7.5-year term loan C at 875-900bps, which has a second claim on assets.

Vine’s concessions tally with other recently-syndicated loans for oil and gas companies. Oil services companies are most affected, although exploration, production and field development companies are also facing substantially higher borrowing costs.

“The midstream business overall has held up pretty well. It’s really the upstream and services sector that have been hit the hardest,” a banker said.

Oilfield services company Abaco Energy Technologies LLC was forced to make several concessions to help a $175 million senior secured term loan backing the Riverstone Holdings LLC-backed company’s $360 million acquisition of Basin Tools Inc clear the market.

Abaco widened an Original Issue Discount (OID) to 94 from 99 and raised pricing to 700bps from 575bps with a 1 percent Libor floor. The deal’s maturity was also reduced to six years from seven years.

Oilfield services company C&J Energy Services Inc also cut the size of a loan backing its merger with a unit of oil drilling company Nabors Industries to $650 million from $675 million.

The deal now consists of a $650 million term five-year term loan B with price guidance of 400bps instead of a $300 million five-year, term loan B-1 at 350-375bps and a $375 million seven-year term loan B-2 at 375-400bps. The discount was also widened to 98 from 99.

The commitment deadline was extended until Nov. 24 and the deal is expected to price this week, sources said.

BRIDGE LOAN

Barclays and Wells Fargo are sitting on an $850 million bridge loan for Sabine Oil & Gas which funded the company’s merger with Forest Oil Corp. The bridge loan was arranged to backstop new bonds as replace Forest Oil’s existing bonds had a change of control put option.

The new bonds have not been issued yet. The bridge loan was priced at 675bp and pricing was due to increase by 50bps every 90 days after funding, in addition to a 1 percent Libor floor, according to LPC data.

The bridge loan had a cap rate of 9.25 percent until Sept. 2, which increased to 9.5 percent until Nov. 1 and then to 9.75 percent. If the high-yield bonds are issued at a higher rate, the arranging banks have to pay the difference, which is typically done by offering a deeper discount.

Sabine said at the time of the merger that it was planning to refinance its existing debt, which consists of a $650 million second lien term loan and $350 million of notes. The company also arranged a new revolving credit with a $1 billion borrowing base.

Regional banks that provide loans to small energy companies could be hit hard in 2015, according to a report from investment banking firm Evercore ISI.

Some management teams view oil prices of less than $70 per barrel as the line where companies can continue to operate without cutting back on planned projects. Cutbacks would reduce demand for expensive loans.

Any pullback could reduce demand for loans as the cost of borrowing climbs.

“Such a pullback could weigh on loan demand as financing needs are reduced,” Evercore said.

Energy loans total between 5 percent and 15 percent of exposure at regional banks. BOK Financial, Cullen/Frost Bankers and Hancock Holding Co have the greatest exposure to the energy sector, the report said. (Editing by Tessa Walsh)

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