Do Adverse Oil Price Shocks Change Loan Contract Terms for Energy Firms?

Abstract

il prices fell sharply in 2014 and have remained persistently low. While low oil prices may stimulate the U.S. economy overall, they can be disruptive to the domestic oil industry. A decline in prices may reduce oil firm revenues in the short run and increase uncertainty around future oil prices and earnings. These twin effects of oil-price uncertainty and lower potential earnings may, in turn, lower oil firms' creditworthiness, thereby reducing available financing for current operations and future investment. A firm's creditworthiness determines whether it can get financing and, if so, under what terms. Perhaps the most important term is the interest rate "spread," defined as the difference between the loan's interest rate and a benchmark rate. Banks typically require a higher spread for borrowers who are less creditworthy to compensate for the borrower's increased default risk. As a result, external factors that affect certain borrowers' profitability and creditworthiness-for example, a shock to the oil industry-should be reflected in price changes on new loans. In this article, we examine whether the relationship between creditworthiness and loan spreads for energy firms in the syndicated loan market changed after the 2014 oil-price shock. We use syndicated

Energy investment variability within the macroeconomy

“…Identifying investment within segments is critical, as each energy segment has its own unique investment patterns and dynamics. I follow prior studies such as Sengupta, Marsh, and Rodziewicz (2017) in classifying firms into upstream, midstream, downstream, and support services segments. However, I identify an additional segment, integrated firms, based the Global Industry Classification Standard (GICS) codes available in Compustat (see appendix Table A-1 for the codes used).…”

“…Firms in each segment of the energy sector have unique patterns of investment and unique investment variability characteristics. Furthermore, firms in each segment may be more or less sensitive to commodity prices, which will also affect their investment decisions (Sengupta, Marsh, and Rodziewicz 2017). Therefore, the segment mix within the energy sector will contribute to investment variability within the overall energy sector.…”

Mispricings in Global Energy Markets

“…We consider the CAPEX ratio because we want to capture changes in investment capacity over our sample period. This has varied substantially specially in the aftermath of the 2014 crude oil price shock which coincided with the start of the US tapering period (see (Cervera and Figuerola-Ferretti 2021) and (Sengupta, Marsh, and Rodziewicz 2017)). Here we argue that CAPEX is key measure due to two main arguments: a) firms with similar patterns of CAPEX investment are expected to share common credit constraints; b) under the transition to the net zero objectives initiated with the signature of the Paris Agreement the evolution of CAPEX investment within energy corporates can be used as a measure of adaptation to the energy transition.…”

Network Topology of Dynamic Credit Default Swap Curves of Energy Firms and the Role of Oil Shocks

“…Besides the GFC and ESDC, the oil price crash of 2014-2015, during which oil prices went from $107 per barrel in June 2014 to $30 per barrel in December 2015, was a noteworthy event that led to the bankruptcy of almost 30% of oil and gas production firms over the period 2014-2016, accentuated by ballooning debt 1 , very high leverage and very low debt coverage ratios 2 (Domanski et al, 2015). Some studies argue that the impact of the oil price crash was much more persistent than the GFC (Sengupta et al, 2017). Recently, the COVID19 outbreak has shaped the oil market and led to a sharp plunge in oil prices.…”

“…Accordingly, crude oil prices represent a source of risk for energy firms (Kerste et al, 2015), which can adversely affect their profitability and possibly their ability to meet debt obligations or get new funds at the same cost. Sengupta et al (2017) indicate that shocks to the oil industry can have an impact on the profitability and creditworthiness of borrowers, which is ultimately reflected in price changes in new loans 3 . Typically, credit defaults tend to arise in waves and concentrate during stressful periods, with the biggest waves of defaults among energy firms arising during the periods of the oil price crash and COVID19 4 .…”