There are three important observations in the latest “Things We’ve Learned This Week” weekly report from Credit Suisse’s James Wicklund.
The first, is that anyone holding out for a big push higher across energy equities as a result of a wave of distressed equity M&A can give up: according to Credit Suisse the next wave of mergers will take place via “debt negotiations”, not equity buyout offers: “the best M&A will be done on the credit side, not the equity side.” This means that instead of stock prices rising, they will collapse as companies engage in corporate reorgs, ones where the debt is impaired partially, and by definition, the equity fully.
The second is that the Dallas Fed was lying when it said our story about the Dallas Fed forcing energy lenders to delay counterparty bankruptcies as long as possible was untrue. This is what Credit Suisse just said:
Give and take between the Comptroller of the Currency and the Fed generated stories of big banks being a bit more lenient rather than swamping regional banks with failures. E&P companies had their borrowing bases upheld, for now, but were told to generate additional liquidity or have those bases cut in the spring
Precisely as we said; it also explains the significant delay in the announcement of Chapter 11 (and 7) filings from the shale patch. It also explains the surge in companies reducing or outright cutting dividends.
But not even these attempts to dramatically conserve liquidity are giving the lender banks much comfort, because as Wicklung says:
while your borrowing base might be upheld, there will be minimum liquidity requirements before capital can be accessed. It is hitting the OFS sector as well. As one banker put it, “we are looking to save ourselves now,” with banks selling company debt for as low as $0.10 on the dollar on companies that only had a 50-75% borrow rates to start.
Wicklund’s full note:
Yikes. We had some interesting conversations with a few friends this week who were swapping “war stories” about the current market. The stories demonstrate the view that acquisitions will be done through debt negotiations, not equity buyout offers. In the E&P space, many banks admit to giving their customers a bit of a pass during fall redeterminations. That was then, this is now. Give and take between the Comptroller of the Currency and the Fed generated stories of big banks being a bit more lenient rather than swamping regional banks with failures. E&P companies had their borrowing bases upheld, for now, but were told to generate additional liquidity or have those bases cut in the spring. The second part was not lost on company boards of directors who have pressured managements to dramatically reduce capex. Now, while your borrowing base might be upheld, there will be minimum liquidity requirements before capital can be accessed. It is hitting the OFS sector as well. As one banker put it, “we are looking to save ourselves now,” with banks selling company debt for as low as $0.10 on the dollar on companies that only had a 50-75% borrow rates to start. That pushes the value to $0.05-0.075 to the dollar. Buying the debt at a significant discount and getting the banks to accept a haircut, rather than going through an expensive bankruptcy process that generates the same results, is the conventional wisdom. That means the best M&A will be done on the credit side, not the equity side. As one friend put it, we just have to find the “nuclear cockroaches” that will survive. Ugly.
For now, however, everyone is delaying the inevitable moment of “credit side M&A” (which is a euphemism for prepack reorganizations), in fading hopes oil will somehow surge and be the proverbial deus ex for the sector. It won’t arrive, at which point the “nuclear cockroaches” will finally start emerging.
via Zero Hedge http://ift.tt/1QzcplL Tyler Durden