When it rains it pours...

The market has taken over The Fed's role - forget above 25bps here or there, the cost of funding for even the highest quality US Corporates is exploding...

 
 

Simply put, the credit cycle has turned and is accelerating rapidly - crushing any hopes for debt-funded shareholder-friendliness.

http://www.zerohedge.com/news/2016-02-09/us-investment-grade-credit-risk-spikes-5-year-highs

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European banks face potential loan losses from energy firms of $27 billion, or about 6 percent of their pretax profit over three years, according to analysts at Bank of America Corp.

“We believe European banks with large exposures to energy and commodities lending will be increasingly challenged over these positions by shareholders,” analysts Alastair Ryan and Michael Helsby wrote in a note to clients on Tuesday. “While long-term oil- and metal-price forecasts are well above current levels, we expect the equity market to continue to stress exposures to current market prices and deduct potential losses from the earnings multiple of the banks.”

The $27 billion estimate is “potentially a smaller figure than is implied in the share prices of a number of banks,” and lenders’ potential losses aren’t a threat to the capitalization of the banking system or its ability to provide credit to the economy, they wrote.

European banks are getting walloped by the global market rout and plunge in global oil prices while struggling to bolster their capital buffers amid record low interest rates in the euro zone. The 46-member Stoxx Europe 600 Banks Index has lost about 27 percent this year, outpacing the 15 percent drop by the wider Stoxx 600.

http://www.bloomberg.com/news/articles/2016-02-09/europe-banks-may-face-27-billion-energy-loan-losses-bofa-says

What is notable is that among the S&P non-sugarcoated comments are some true fire and brimstone gems, which suggest that the big picture for banks with substantial energy exposure is about to get far worse. Here is what S&P said:

These rating actions follow a review of U.S. regional banks with large energy  loan portfolios as a percentage of both total loans and Tier 1 capital. Since we revised our outlooks to negative on five regional banks in January 2015, energy prices have declined by more than one-third and the asset quality of energy loan portfolios has deteriorated materially, albeit from fairly benign levels.Throughout 2015, criticized and classified assets climbed significantly, and in the fourth quarter, several regional banks with large energy loan portfolios reported increases in loan loss provisions and energy loss reserves to varying degrees, and, in certain cases, nonperforming assets (NPAs) also rose.

Given further declines in energy prices in recent months, less hedging activity by borrowers, and potentially more difficulty for borrowers to cure (i.e., resolve) borrowing base deficiencies through capital raises or asset sales, we think troubled debt restructurings and NPAs in the energy sector will increase, possibly sharply, in coming quarters. We also think banks will increasingly emphasize the potential loss content among rising levels of NPAs that we expect to see throughout 2016. In addition, we think regulatory scrutiny of energy loan portfolios will increase in 2016, including during the upcoming Shared National Credit (SNC) exams (two will be conducted in 2016) and the annual stress tests regulators mandate, which may encourage the use of higher loss assumptions.

Many banks have been lowering their energy price assumptions ("price decks") for exploration and production (E&P) loans throughout 2015, resulting in reduced borrowing bases (the value of a borrower's reserves against which banks typically lend). In the next semiannual borrowing-base determination this spring, we expect that borrowing bases will decline further, mainly because of lower energy prices (i.e., valuations) and possibly lower reserve replacement, which could lead to more borrower deficiencies (i.e., loan balances that are greater than the borrowing base). Although banks typically allow borrowers as long as six months to resolve a deficiency, we think many borrowers will have fewer options to cure through debt capital issuances or asset sales and dispositions, which were more common last year. Specifically, the cost of capital has increased for many borrowers, and private equity firms may be less willing to commit additional capital to resolve deficiencies. In addition, E&P borrowers may have unsecured debt in addition to their reserve-based loans, which could pressure their overall finances and push them into default or bankruptcy.
 
Equally as important, we think the performance of indirect credit exposures in local energy-focused markets could deteriorate somewhat over the next two years. Although deterioration has not yet been meaningful, we still think the energy price slump could hurt commercial real estate (CRE) in these local markets, such as Houston or smaller cities in Texas, throughout 2016 and 2017.However, we recognize that lower energy prices could have a broad-based positive impact on U.S. consumers and corporations where energy is a significant input cost. We are also wary of strategies that some banks may execute to aggressively grow their loan portfolios in other loan segments, such as CRE, in order to offset contraction in their energy loan portfolios.

Although we expect that banks will likely continue to increase their loan loss provisions and reserves within their energy loan portfolios over the next several quarters, we consider that currently low NPAs, solid preprovision earnings generation, and, in some cases, high risk-adjusted capital (RAC) ratios offer the banks a cushion to absorb higher loan loss provisions. This was a key factor in our decision to limit our rating actions to one notch at this point.

In our analysis of these companies, we evaluate the potential impact of certain adverse scenarios, based on default and net loan loss assumptions for different types of energy lending. For example, we expect that E&P reserve-based lending will have lower net loss rates than energy services lending because of conservative advance rates on reserve collateral. We will continue to consider the array of possible assumptions regarding energy loan default and net loss rates, as the cycle develops. At this time, however, we do not believe that these banks' loan loss provisions would exceed preprovision earnings under most foreseeable scenarios, and, thus, our rating actions following this review were limited to a one-notch downgrade.

The following table presents a few of the key metrics we are tracking and lists the banks that are included in today's actions, as well as others we believe have above-average exposure to energy.

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Some Saudi Arabian construction companies are struggling to pay their staff on time in a sign of growing pressure on the economy from low oil prices, which are causing the government to slow spending on building projects.

In an unusual move this week, the Ministry of Labour issued a public statement saying workers at a "major institution" had complained they had not been paid for months. It said it had established the complaints were true and taken remedial action.

The ministry did not name the institution or give details of its action; it did not respond to telephone calls seeking comment. But senior industry sources told Reuters that the firm was in the construction sector and that at least several other sizeable companies in the industry faced the same problem.

One executive at a large Saudi construction firm, speaking on condition of anonymity, told Reuters it had been having problems paying its employees for a few months. "It's not just us, it's several construction companies that work on government projects," he said.

As the government of the world's top oil exporter slows spending to reduce a budget deficit of around $100 billion, construction is proving to be the hardest hit sector, because firms depend heavily on government business for their cash flow.

"The pace of execution on some of the existing projects has slowed down, so a project that would take six months to complete may now see an extended execution time line," said Murad Ansari, analyst at EFG-Hermes in Saudi Arabia.

"Moreover, government payments have slowed down. As a result, contractors which normally rely on short-term funding for projects are feeling an impact on their working capital, so their ability to repay debt is not as strong as it was before."

Construction accounts for only about 7 percent of Saudi gross domestic product. But in coming months the sector's difficulties could have a wider impact as suppliers are hit and banks lending to the industry take more provisions for potential bad loans.

Delayed payments to staff, sometimes due to red tape and inefficient bureaucracy rather than financial difficulties, have been a feature of the construction industry in Saudi Arabia and the Gulf for years.

But the problem has worsened greatly in the last few months because of government austerity measures, industry executives said, speaking on condition of anonymity because of commercial sensitivities.

"Many contractors are awaiting payment from the government. It's an industry-wide problem," said an executive at another construction firm operating in the kingdom.

http://www.reuters.com/article/saudi-construction-slump-idUSL8N15N2LU

Russia on Tuesday began its appeal in the Netherlands against an international arbitration order that Moscow pay $50 billion in damages to shareholders in the defunct Russian oil giant Yukos.

Most of Yukos' assets were acquired by Russia's state-owned oil producer Rosneft after Yukos was declared bankrupt and its founder Mikhail Khodorkovsky was imprisoned.

Once Russia's richest man, Khodorkovsky was accused of tax evasion and fraud after he fell foul of the Kremlin. He was released suddenly in December 2013.

In July 2014, the Permanent Court of Arbitration in The Hague issued the order for three cases that had sought a total of $114 billion from Russia for expropriating Yukos' assets.

Russian's appeal at The Hague District Court seeks to overturn all three decisions and have the damages waived, a court official said.

A ruling in the case in the Netherlands could be issued in six weeks at the soonest, he said.

In December, a French court of appeal turned down Russia's request to suspend the seizure of Russian assets in France carried out by former Yukos shareholders.

Yukos shareholders began in June 2015 seizing bank accounts and properties in Paris and other parts of France belonging to the Russian Federation.

http://www.reuters.com/article/russia-yukos-appeal-netherlands-idUSL8N15O1P2

Global diversified natural resource company Glencore is expected to wrap up senior syndication of a one-year revolving credit that refinances existing debt by the end of next week after a strong market response, bankers said on Tuesday.

Glencore is refinancing a US$8.45bn loan that supports the company's trading activities, and was agreed in May 2015.

The refinancing raised around US$8.5bn from Glencore's top lenders. The company may reduce the facility slightly but the deal is unlikely to be below US$8bn, bankers said.

Glencore's core relationship banks backed the deal despite commodity markets volatility and 34 banks committed US$250m each to the loan.

Glencore did not immediately comment.

The loan is expected to be launched to a wider general syndication in April after Glencore releases its results by active bookrunners ABN AMRO, HSBC, ING, Bank of Tokyo-Mitsubishi UFJ and Santander.

The existing loan was part of a bigger US$15.25bn financing that was arranged in May 2015, which also included a US$6.8bn, five-year revolving credit facility that will stay in place.

Pricing on the new loan is very competitive, a banker said. Last year's financing paid margins of 40-45bp over Libor, but the market has moved against mining companies in the interim.

Glencore is rated Baa3/BBB- after recent credit rating downgrades from Moody's and Standard & Poor's (S&P) in December 2015 and February 2016 respectively.

Moody's said that the pricing environment in the mining industry would remain unfavourable in 2016-17 as a reason for its downgrade and S&P cited material challenges to the mining industry.

Other recent loans for similarly rated European companies have paid around 50bp over Libor.

http://www.reuters.com/article/loans-glencore-idUSL8N15O3S5

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The Democratic Republic of Congo, the world’s largest source of cobalt and Africa’s biggest copper producer, dropped plans to change its mining code after opposition from mining companies, Mines Minister Martin Kabwelulu said.

“The mining code which is currently in place will stay in place,” Kabwelulu said at a speech to investors in Cape Town on Wednesday. “You don’t have to think about modifying your business plan. Those who are thinking of investing can do so based on this code.”

Congo began reviewing the 2002 mining code in 2014. Revised laws approved by the government in March included increases in profit tax to 35% from 30%, raising the government’s free share of new mining projects to 10% from 5% and royalties on copper and cobalt revenue to 3.5% from 2%.

The Chamber of Mines at the Federation des Entreprises du Congo, a business lobby group, had opposed revisions to the code because of the potential negative impact it could have on investment in mining. Randgold Resources chief executive officer Mark Bristow said in October the proposed revisions to the code risked destroying the industry.

Randgold mines gold in the Congo in a joint venture with Johannesburg-based AngloGold Ashanti, while companies including Baar, Switzerland-based Glencore and Phoenix, Arizona-based Freeport McMoRan extract copper from the central African nation.

http://www.mineweb.com/news-fast-news/congo-drops-revisions-to-mining-code-on-industry-opposition/