Client Alert: WARNING: Troubled Loans Ahead
- Review not only your bank's energy-related credits, but also other credits that could be exposed to volatility in the energy sector.
- Consider external reviews to ensure files are properly documented, and that your collateral is secured and properly perfected.
- Develop strategies for addressing troubled oil and natural gas credit issues before and during your next examination.
Potential Troubled Loans in Energy Sector
Banking regulators are increasingly becoming concerned about potential troubled loans caused by weakness in the energy sector. Specifically, the volatility and decline in oil and natural gas prices are adversely affecting producers, suppliers and other businesses exposed to the industry.
A recent example of this concern is the FDIC-issued guidance addressing oil and gas related credits and loan workouts.
Energy exposure (especially oil and natural gas) is not just limited to banks with direct exposure to the industry. Even if your bank does not directly lend to the energy industry, it may be indirectly exposed in the following areas:
- Hotels, rental housing, food and other similar businesses near areas of oil and gas production
- Industry suppliers
- Equipment rentals
- Other oil and natural gas-related service companies
Regulators are expecting banks exposed to these credits to employ the following best practices:
- Maintain sound underwriting standards
- Practice strong credit administration practices
- Apply effective risk management strategies
The regulators are also expecting banks to develop a well-conceived workout plan for these credits, and to work with defaulting borrowers.
Preparing for Distressed Oil & Gas & Related Credits
Unsurprisingly, some of our bank clients are sharing with us that their portfolios of troubled oil and natural gas credits are increasing, and that their examiners are increasing their scrutiny on those relationships. Your bank should review not only its energy-related credits, but other credits that could be exposed to volatility in this sector.
Besides the bank’s internal review, we can also review these files to ensure that they are properly documented, and that your collateral is secured and properly perfected. We can also advise on legal strategy before the situation deteriorates and ensure that your bank is acting vigilantly and prudently in light of recent guidance. Finally, we can help you develop strategies for addressing these issues before and during your next examination.
We Can Help You
Please contact us if you are interested in discussing these issues or seeking counsel in reviewing your portfolio.
FDIC-Issued Guidance Addressing Oil & Gas Related Credits & Loan Workouts
Barack Ferrazzano Financial Institutions Group
Our 30-attorney Group has represented more than 250 financial institutions across the country.Our M&A experience is unparalleled—over the past decade, our Group ranked #1 in the Midwest region by number of announced bank and thrift merger and acquisition transactions—according to SNL Financial. The Financial Institutions Group was again named as one of the top financial institution groups in the nation in the U.S. News & Best Lawyers 2016 report.