Changes to lending program could lift flailing oil firms
Changes the Federal Reserve made to its soon-to-start lending program for midsize companies could give ailing oil producers more time to pay off loans and easier access to money as they try to make it through the coronavirus pandemic.
Oil lobbyists are eyeing the central bank’s Main Street Lending Program as a lifeline for companies struck hard by the downturn in oil prices amid the stay-at-home orders to stop the spread of the virus. The program is part of a massive stimulus effort aimed at all sectors of the economy to help it survive the economic downturn sparked by the pandemic.
While companies from all sectors can apply for the loans from the program, which is expected to dole out up to $600 billion, environmentalists are already up in arms about it potentially being used to bail out oil companies.
The central bank announced last week that it will give borrow ers an additional year to repay the low-interest loans in five years instead of four. Companies will also have a holiday on making payments on the principal of two years instead of one year.
The extra time is beneficial to all industries, said Kevin Book, an analyst at ClearView Energy Partners. But it will be especially helpful for oil companies as they wait for the price of crude to recover after dropping by nearly 40 percent since the start of the year.
“Not everyone thinks this will be a two-year or three-year turnaround,” he said.
For heavily indebted companies that want to refinance their existing debt, the Fed said it will buy 95 percent of the loans, up from 85 percent, with private banks taking on the rest.
By absorbing more of the risk, the Fed is encouraging the flow of credit to firms already saddled with debt. That includes many
U.S. oil producers that raced to grow during the fracking boom of the past decade.
And for companies looking to expand an existing loan, the central bank said it is raising the maximum loan from $200 million to $300 million.
Increasing both the loan size and the public share of debt is a “surefire way to put taxpayers on the hook for distressed oil companies,” said Lukas Ross, senior policy analyst for the environmental group Friends of the Earth.
Lee Fuller, executive vice president of the Independent Petroleum Association of America (IPAA), expressed cautious optimism at the Fed’s announcement, noting that private banks still need to sign off on any of the Fedbacked loans.
“We’re gathering that access may depend on the lender and vary bank to bank,” he said.
Last month, the Fed said it would give companies with higher debt-to-earnings ratios access to more lending options — a boon to highly leveraged oil firms.
And in a reversal from its previous stance, the Fed also said it would permit borrowers to use the loans to pay off old debt. That move was called for by both IPAA, which represent small to midsize oil producers, and Texas Sen. Ted Cruz.
The oil-state lawmaker wrote in an April 24 letter to Fed Chair Jerome H. Powell and Treasury Secretary Steven Mnuchin that preventing oil companies from using the Fed-backed money to refinance “risks the loss of hundreds of thousands of American jobs and irreparable damage to our domestic energy infrastructure.”
Forty-seven congressional Democrats, in turn, have accused the Fed of helping to bail out financially imprudent fossil fuel firms.