Non Payment Defaults in the Energy Service Sector

With a record number of defaults in the oil and gas sector, banks and other lenders are pulling back on loans and credit lines. And not just to the oil and gas companies. The entire energy sector is feeling the pain including oil field service companies. Typically banks won’t call a loan unless the borrower misses a payment or shuts down. This time, however, banks are calling a record number of loans including loans where the borrower never missed a payment.

Yesterday we spoke with the owner of a service sector business that supplies assemblies for offshore drilling platforms. His bank just called his credit lines even though he has never missed a payment or been late. How can lenders do that?

It is called a nonpayment default. (Sometimes called a pretextual default or nonmonetary default). In his business’ case, the bank invoked a clause that lets them call a loan when the bank feels it is “at risk.” They also claimed he was late in sending a financial statement.

The takeaways from this story are several. First, read your loan documents carefully. Pay particular attention to the sections on default. Also, make sure you don’t do anything that would make the bank’s job easier. That means making sure that financial reports are sent when due, all collateral is properly insured, all lawsuits are addressed timely, etc. Finally, be aware of maturity defaults. Even though your lender rolled over a business loan year after year, be prepared that the loan will not renewed this year.

Frankly, with many banks now inserting totally arbitrary language allowing them to default a borrower at any time, there is no guarantee these measures will work. But dotting the “I’s” and crossing the “t’s” makes it much more difficult for the bank to declare a default and later prevail in court.

Any bank with a high percentage of loans to the energy sector is prone to overreact and improperly default a borrower. Among big lenders, J.P. Morgan Citi and Morgan Stanley have significant energy loans in their portfolio.

Regional banks with big energy loan portfolios include MidSouth Bancorp, BOK Financial (Bank of Oklahoma), Cullen / Frost Bankers (Frost Bank), Hancock Holding (Hancock Bank and Whitney Bank), Green Bancorp, ViewPoint Financial, Iberiabank, National Bank Holdings (Bank Midwest in Kansas and Missouri, Community Banks of Colorado in Colorado, and Hillcrest Bank in Texas), Texas Capital Bancshares and Prosperity Bancshares. MidSouth Bancorp, operator of MidSouth Bank, has a staggering 20% of its loan portfolio tied up in the energy sector.

Earlier this year, the Wall Street Journal reported that banks had extended $147 billion in credit lines to energy companies. We are seeing that many companies now find that some banks won’t honor their loan commitments when cash strapped energy companies go to draw down on their credit line. When they most need the money, some bankers are creating excuses to keep from honoring their existing loans and credit lines.

Lender Liability and Credit Lines

“Can I sue my bank?” That is a question we hear daily. Banks can be successfully sued for failing to honor credit lines and loan commitments. Unfortunately, unscrupulous bankers know that when businesses are cash strapped, those same businesses don’t have the money to hire lawyers.

The lender liability lawyers at MahanyLaw and Judge, Lang & Katers understand the problems associated with suing banks. Because our lender liability practice is limited to representing businesses and high net worth individuals who were defrauded or mistreated by banks, we understand the issues and know how to quickly get banks to the table.

Because of our experience and location in the Midwest, we can handle cases nationwide for very reasonable rates. Much more reasonable rates than larger general commercial litigation firms or law firms located in major cities.

If you are wondering how to sue your bank or if you have a good case, give us a call. For more information, contact attorney Brian Mahany at [hidden email] or by telephone at (414) 704-6731 (direct).

MahanyLaw and Judge, Lang & Katers – America’s Lender Liability Lawyers “We Sue Banks