Lower oil prices have pushed the value of the bonds issued by junk
rated highly indebted companies. Banks are finding it difficult to load
these securities out of its balance sheet and incurring losses.
As Federal Reserve prepares to raise rates from zero bound this year,
it has put a brake in issuance of these securities. Three years of oil
boom has resulted in large amount of issuance.
- According to Dealogic, these loans grew from$40 billion in 2009 to
$210 billion by 2014 fuelled by hunt for yield from investors. However
good times are over.
- According to Dealogic Wall Street banks earned about $31 billion in
fees from issuing securities on behalf of these companies. Banks after
issuing loans usually turn them into collateralized products and sell
them off to investors, mutual funds.
Case study -
A case study from Wolf Street shows how the banks might be suffering.
- In June Citigroup handed out $1.3 billion loan support for
C&J energy services. However it failed to unload the package after
several discounts. Finally the group ends up with $80 million loss
including all fees related revenue earned.
Regulators and FED have been warning the banks about these leveraged
loans for past two years, however until now banks turned deaf ears to
the warning. During 2008 crisis banks got stuck with billions of
dollars' worth of leveraged loans.
Troubles surfacing in the energy industry regularly.
- Willbros group that earned $2 billion in 2013 in revenue, last week
disclosed that it is having troubles with liquidity and asking for
waivers from lenders.
- Saratoga Resources from Texas is going for restructuring advisers to
negotiate senior debt as informed on last Thursday. The company missed
interest payments worth $9.2 million.
With energy prices continue to remain low, more are expected to
follow suit and increase the costs of those Wall Street banks, who were
not able to unload the leveraged loans of energy industry.