Banks are going to pull the plug on energy companies
Oil prices plummeted in late 2014, and have remained low. Energy companies often borrow money using their reserves as collateral.
With the value of those reserves falling as commodity prices slide, they will be able to borrow less in the future, and may have to repay parts of some existing loans.
Banks are now basing their lending decisions on a price of $48 per barrel of oil, according to a survey by Macquarie. That compares to a price of $77 per barrel at the end of the last year, according to Bloomberg.
The chief executive of Whiting Petroleum said earlier this month that the maximum amount of money it could borrow may drop from $4.5 billion to $3.75 billion as a result of the changes, according to the Bloomberg report.
A recent survey by law firm Haynes Boone LLP meanwhile found that financial institutions and private equity firms expect "borrowing base redeterminations," or the value of companies' assets that can be posted as collateral, to fall.
In addition, banks regulators are paying closer attention to the sector. According to Emily Glazer, Ryan Tracy, and Louise Ensign at The Wall Street Journal, big banks are facing pressure from Washington on their energy portfolios.
Regulators from the Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corp met with bankers in Houston earlier this month to discuss reserve-based lending requirements, according to the report.
The result is tougher standards for loans, potentially higher prices for borrowers and a quick path to Chapter 11 for struggling companies that are pushed closer to defaults thanks to the plummeting price of their underlying assets.
