More Oil Companies Qualify For Federal Reserve Loans After Rules Change

Through Jennifer A. Dlouhy, Ari Natter and Saleha Mohsin to 5/1/2020

WASHINGTON (Bloomberg) – The Federal Reserve has revamped its Main Street loan program to allow struggling oil companies to qualify for aid after industry allies pressured the Trump administration for changes.

Larger, more heavily indebted companies can now qualify and use the money to repay past loans as part of the changes announced by the central bank on Thursday.

The move opens the door for more oil and gas producers, said Senator Kevin Cramer, a Republican from North Dakota, who had pressed the administration on the issue as energy companies struggle to survive an epic collapse fuel demand and crude prices.

“With falling demand and oversupply due to the global oil price war creating a valley for these highly leveraged companies, this expansion will help them bridge the gap as we seek to reopen America. “Cramer said in an emailed statement Thursday.

Environmentalists have blasted the changes they say rewarded oil companies that took on too much debt and overproduced crude even before the coronavirus pandemic plunged demand.

“These changes directly reflect the demands of polluters and their favorite members of Congress,” said Lukas Ross of the environmental group Friends of the Earth. “Long before the coronavirus, drillers were in big trouble. Now the frackers want to pay off their debts with our money. Trump’s big oil bailout must be stopped.

For weeks, oil industry advocates have warned that the program’s original structure would prevent besieged drillers from accessing capital under the program.

Senator Ted Cruz, a Republican from Texas, and the Independent Petroleum Association of America argued that oil companies needed more flexibility to use Main Street loans to pay off existing debt – which was previously prohibited but which will now be authorized under certain conditions.

The maximum total loans under the Main Street program are also raised to $ 200 million, from an earlier cap of $ 150 million considered too low to help oil producers.

“Great news from the Fed today to support struggling US energy companies,” Energy Secretary Dan Brouillette said in a tweet on Thursday. He added that he would “continue” his work with Treasury Secretary Steven Mnuchin to bring “another relief” to the industry.

The Fed said the changes were not aimed at the oil and gas industry or any specific industry, but followed additional research into slices of U.S. companies that do not have easy access to capital markets.

Still, the new conditions are likely to open it up to a larger group of energy companies, and supervisors feared the Fed would bend under the pressure.

“The major changes announced today reflect the major demands of the oil and gas industry,” said Bharat Ramamurti, a member of the congressional panel appointed to review the implementation of the Fed’s virus programs and d ‘part of Treasury virus control programs.

“This raises questions about how the changes promote the wider public interest, especially when these companies will still have no real obligations to retain or rehire their workers,” Ramamurti said on Twitter.

Credit ratings. Even before the changes, oil and gas companies with blue chip credit ratings could obtain financing through a separate program, the Fed’s primary and secondary market corporate credit facilities.

However, under terms released on April 9, funding was limited to companies that had credit ratings of at least BBB- / Baa3 as of March 22 – a deadline that could come too late for some oil producers, like Occidental. Petroleum Corp. , whose debt was reduced to nil by Moody’s on March 18, followed by Fitch and S&P on March 20 and 25, respectively.

Republicans argued that funding should be available for oil companies whose credit ratings have fallen amid the coronavirus pandemic and a rise in crude triggered by a battle between Russia and Saudi Arabia for them. market shares.

On Thursday, the Fed said that lenders would now be able to apply their “industry-specific expertise and underwriting standards to best measure a borrower’s income.”

Highly leveraged businesses can also take advantage of a new third loan option that comes with increased risk sharing by lenders.

It was not clear on Thursday whether the changes would qualify Occidental for aid – or whether potentially newly eligible oil companies would ask for it. Occidental declined to comment on the matter.

The Fed’s approach to fine-tuning the Main Street loan program avoids creating an oil industry-specific initiative that could be unpopular with the public or require congressional approval, which Democrats are deeply opposed to.

The law requires the Fed’s emergency facilities to be large, which the central bank says prohibits providing aid to specific industries.

The oil industry itself has been divided over government assistance targeted to the sector. While some small independent producers and their trade groups have pleaded for government loans, the idea of ​​aid targeted at the industry has met with resistance from the larger, more foolproof multinational oil companies as well as their core group. lobbying, the American Petroleum Institute. .

Industry opponents of targeted loans fear that taking taxpayer money now could cost them political capital in Washington and then be used to forge enemies against the industry.

“You cannot have capitalism on the rise and socialism on the decline,” said Frank Mariachi, senior vice president of the American Petroleum Institute. “The role of government is to ensure appropriate economic stabilization throughout the economy. We do not believe that the role of government is to become the private economy.

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