HSBC said to take loss on Petroceltic loans as oil pain spreads

Bank sells its loans at about 30% of face value to activist shareholder Worldview

HSBC is discovering the oil crash extends far beyond the deserts of the Gulf, the plains of west Texas and the shale fields of North Dakota. Even a small energy company in Dublin can inflict pain.

The lender led a group of banks that extended up to $500 million three years ago to Petroceltic International, helping the Irish oil and gas explorer develop its prized gas field in the southeast of Algeria. With the company now facing a collapse in energy prices and locked in a feud with an ex- Deutsche Bank trader-turned-activist shareholder, HSBC has sold its loans at about 30 per cent of face value, according to people with knowledge of the sale.

HSBC’s soured relationship with a client it once touted on the bank’s website illustrates the boom-to-bust in energy lending driven by falling oil prices. While Europe’s lenders say many of their loans are to industry giants that can ride out the slump, that still leaves $113 billion in lending to minnows, wildcatters and other junk-rated companies, Bank of America analysts wrote last month.

"A lot of these smaller, independent companies are really stressed under the current oil price,'' said Victoria McCulloch, an energy analyst in Edinburgh with Royal Bank of Canada. "This year is going to be tough for the banks that lent to them."

Petroceltic applied for protection from its creditors in Dublin this month through an Irish form of Chapter 11 bankruptcy. Worldview Capital Management LLP, an activist shareholder that's been fighting for control since 2014, purchased the majority of its $233 million of outstanding debts the next day from HSBC and the International Finance, a branch of the World Bank, the people said.

Selling out

Worldview, controlled by a Bulgarian ex-Deutsche Bank proprietary trader named Angelo Moskov, paid about 30 cents on the dollar for the loans, inflicting losses of about $112 million on lead lender HSBC and IFC, according to the people.

Sarah Marquer, a spokeswoman for HSBC, declined to comment on the sale of loans. Petroceltic’s application to seek creditor protection made prospects of repaying loans “even more uncertain” and selling out to Worldview was in the IFC’s best interests, Frederick Jones, a spokesman in Washington, said in an e-mail.

Much has changed since April 2013 when Petroceltic tapped HSBC, IFC, Standard Chartered Plc and Nedbank for a debt facility to boost production in Egypt and Bulgaria and fund development of the Ain Tsila gas field in the Algerian desert. Natural gas prices were double their current level and oil was trading around $90 per barrel. IFC described the deal as part of its strategy to "support companies in emerging markets with strong management teams."

HSBC placed a video on its website of Petroceltic chief executiveBrian O'Cathain and chief financial officer Tom Hickey discussing their relationship with the bank.

Oil exposure

Today, the HSBC video no longer plays. Petroceltic’s shares were suspended March 7 at about 7 pence each, down 96 per cent from two years earlier. The unraveling of Petroceltic, which employs about 160 people from Dublin to Africa, shows how much European banks have to lose among the smaller oil and gas companies that focus just on exploration and production, known as EandPs. Almost 35 per cent of EandPs, some 175 publicly-traded companies worldwide, are “high risk” with more than $150 billion of debt and weak ability to service it, according to a Deloitte LLP report.

More than 50 EandP companies with debts of about $17.4 billion have filed for bankruptcy in the U.S. and Canada since 2015, according to law firm Haynes and Boone LLP, which advises on debt restructurings and asset sales.

The risk on Petroceltic almost panned out for shareholders. In October 2014, with oil trading for about $90 per barrel, the company received a 492 million-pound ($700 million) buyout bid from Dragon Oil. Within two months, the price of oil had tumbled by one-quarter, and Dragon pulled out of the deal. Enter Moskov, who spent 2015 trying to oust top executives and prevent any more fundraising after taking a more than 20 percent stake. Worldview requested a number of emergency general meetings and sued Petroceltic. The company said the suit, which is still pending in Ireland, was "totally without merit." On March 3, Worldview offered to buy the company for 3 pence a share, a bid that Petroceltic directors said undervalued the company.

In buying out HSBC and IFC’s loans, Moskov has secured much control over Petroceltic’s future. Spokesmen for Worldview and Petroceltic declined to comment. “Petroceltic’s lending banks will have observed the deterioration of operating and financial performance and, in light of the shareholder conflict, appear to have chosen to cut their losses,” said Mark Henderson, an analyst with Stockdale Securities Ltd. in London. “Worldview is now in control.”

Bloomberg