Page 22: of Marine News Magazine (December 2016)

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FINANCE

EFG:

Energy, Finance & the GoM

Some positive market indicators could presage an investment revival in the U.S. Gulf of Mexico – and beyond.

By Richard J. Paine, Sr.

The good news, reported by Bloom- the vessel. Forbearance is an agreement between a lender berg, is that in the third quarter of and borrower to temporarily postpone payments or oth- 2016, the largest oil companies in- erwise amend the ships mortgage to avoid foreclosure and creased cash from operations by nearly seizure of the collateral. Rather than repossess the vessel, it $26 billion. This re? ects a 67% in- may be in the bank’s best interest to leave custody of the crease from the previous quarter and vessel in the hands of the borrower and have the mainte- more than twice the amount of the ? rst nance, dockage and other costs of a vessel continued to be quarter of 2016. Exxon Mobil, Royal paid by the obligor. It also allows the obligor to work the

Dutch Shell, Chevron, Total and BP vessel and generate revenue from its operation.

Paine indicated that the increase was due to While many lenders have left the mainstream borrower lower spending, increased output and high and dry, the solvent, near investment grade credit is rising crude prices, although the numbers were still below still the apple of their eye. The process begins with origina- last year’s numbers. tion of the loan or lease with rate, term and conditions be- ing acceptable to the obligor. From there, the lender deter-

C C , F T mines it’s “appetite” for the amount of debt it is willing to

URRENT ONDITIONS UTURE RENDS

It is obvious why this is good news. More cash means hold for an obligor. All bank and equipment ? nance com- more production which in turn means more work for Gulf panies have loan size or credit risk limits. To lend outside

Coast operators. It comes at a time when many lenders and of those limits, they may choose to sell the entire loan or a lessors have ? ed the Gulf market. While the number of ac- portion of it to other lenders or investors. They can either tive lenders has signi? cantly decreased, it is only part of the retain the servicing of the loan or sell servicing off as part cycle that many of us have experienced before. of the sale. This is known as syndication. Another method

With a new, more energy friendly Trump administration to reduce loan size or credit risk is known as participation. soon to be in place, the probability is good that the reversal If two or more creditors agree to share the amount and of the trend may begin early in 2017. This may be just credit risk of a transaction equally, all having equal rights in the nick of time as the reticence of equipment ? nance of payment or seniority, the participation is considered sources to lend or lease has increased dramatically. Many pari passu (Latin for ‘equal footing’).

have been forced to back off one way or another, and take In order to have originations, syndications or participa- a seat on the sidelines. During this downturn, as more tions, it is necessary to have an obligor and one or more borrowers and lessees have taken signi? cant hits to their funding sources. Historically, commercial marine ? nance bottom lines, more vessels are cold stacked, underutilized companies have come and gone alternately pursuing the or overpopulated and are not creating the revenue neces- market aggressively or disappearing by choice or necessity, sary to service an obligor’s debt load. buyout or merger. When the marine market is strong,

In normal times, lenders were not as accommodating as lenders come out of the woodwork. When it hits rough they have been forced to become now. Missed or late pay- waters, they disappear beneath the waves. Neither scenar- ments lead to forbearance which could, if the de? ciency io bene? ts the industry as when times are good, “stupid was not remedied, would lead to foreclosure and seizure of money” drives rates down, but also drives credit quality

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