Oil price drop could bring bigger fees for syndicated loans

One topic dominating loan bankers’ conversations this year is the fall in the price of natural resources. The Brent front month contract has fallen 55.7% since June 30. Base metals have also been dealt a blow, with copper on the London Metals Exchange having fallen 11% this year alone, according to Bloomberg.

Lending banks are busy tallying these dynamics with borrowers' repayment profiles, to determine the imminent credit needs of companies in sectors that have been hit by lower prices.

While most believe upstream oil and gas companies will defer capital expenditure needs to try to contain costs, and thereby counter the impact of the crude price drop, those that do need financing may need to cough up more in fees to compensate for the uncertain outlook.

“Commodity companies are getting more difficult to finance,” said a senior banker at a European lender. He said banks are keeping an eye on any signs of credit stress in economies that depend on revenues from natural resource exports.

“I think it would be a fair comment that depressed commodity prices are going to slow up capital investment within Indonesia [which is coal and mining dependent],” said a Singapore based banker whose employer is active in Indonesian state owned deals.

But a number of factors would have to be present to reduce meaningfully the bargaining power of borrowers in affected sectors, said bankers.

“It depends on the segment and how the client is positioned,” said a Taipei based banker. “We will take longer to assess whether to lend to natural resource clients in, say, iron and steel. Plus we are expecting a [US Federal Reserve] interest rate hike in the second or third quarter, so we expect a lot of borrowers to secure funding during the first quarter.”

“If the price continues to fall then natural resource clients will have much less bargaining power,” he added.

Oil production companies in Asia, such as Petrochina and Oil India, can comfortably operate under low oil prices for some time, given their generally low cash production costs and strong liquidity, wrote Fitch analysts in a note on January 13.

“Over the longer term though, with all-in costs exceeding $35 per barrel of oil equivalent for the rated Asian names, the economic viability of projects will be impaired if there is no meaningful increase in oil prices,” they wrote.

Yet while capital market instruments, including bonds and equities, are quick to adjust to macroeconomic developments, the Asian loan market is much slower to respond, as the time lag between the launch and close of a deal ranges from a few weeks to several months. As a result, any increase in fees is only likely to come after at least six months, said bankers.

“Generally, over the next six to nine months, banks will take a more cautious approach, especially if they’ve been asked to increase exposure to an industry that has been affected,” said a Hong Kong based banker at an international lender.

“If financials deteriorate significantly then people will start changing their strategy, but loan pricing is more sticky than bonds. Headline events won’t change returns.”