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The Trump administration faces significant hurdles in getting the Federal Reserve to help rescue an oil industry squeezed by plunging crude prices given the central bank’s aversion to helping specific industries and its lack of authority to help businesses that are insolvent.
The Fed regards loan programs aimed at a specific industry as credit allocation — something Chairman Jerome Powell specifically rejected in an April 9 speech. But Treasury Secretary Steven Mnuchin told Bloomberg News Thursday that the administration was looking to help battered oil companies by “providing a lending facility for the industry.”
Fed officials have given no indication that they have departed from the view that direct financial support “falls to elected officials,” as Powell said. A Federal Reserve spokesperson declined to comment.
Oil companies that were investment grade as of March 22, or that were downgraded just below that level as of that date, are eligible for Fed corporate lending facilities. The Fed has given no indication that it intends to change the cutoff date.
Oil prices have crashed globally, down about 70% this year after benchmark West Texas Intermediate futures went negative earlier this week. Disagreements among oil-producing nations and rising stockpiles since demand collapsed amid the coronavirus outbreak have put oil companies at risk of shutting down.
Earlier this week, President Donald Trump said he’d asked Mnuchin and Energy Secretary Dan Brouillette to find a way to help those companies.
Many highly leveraged oil producers were already in peril before coronavirus-related closures caused an unprecedented collapse in demand. And across the industry, producers saw their ratings pummeled by dropping crude prices tied to Russia and Saudi Arabia’s decision to bolster output in early March as they fought a price war.
Their tenuous position makes many of them largely ineligible for aid from the lending facilities created by the $2.2 trillion stimulus package. Under term sheets released April 9, Fed loans were restricted to firms that had credit ratings of at least BBB-/Baa3 as of March 22. That cutoff date could be too late for some oil producers, such asOccidental Petroleum Corp., which had its debt cut to junk by Moody’s on March 18, with Fitch and S&P following on March 20 and March 25, respectively.
Republicans, led by Senators Kevin Cramer of North Dakota and Ted Cruz of Texas, argue that the Treasury Department and Fed should shift the date earlier so company ratings predate the Russia-Saudi maneuvering.
“Not only were businesses and financial markets already reeling from the Covid-19 pandemic before March 22, but oil and gas companies were impacted with increased financial pressure following a March 6, 2020, OPEC+ meeting where production cuts in response to Covid-19 failed to materialize,” they said ina letter to Mnuchin and Powell earlier this week.
Subsequent decisions to escalate production on top of the turmoil “substantially shook energy producers, impacting their bottom line more than two weeks before March 22,” the senators said.
In a separate letter on Friday, Cruz insisted that the restrictions would prevent small- and medium-sized oil and gas companies from accessing liquidity needed to avoid bankruptcy.
Cruz also urged Mnuchin and Powell to “immediately create” a new lending facility to aid small- and medium-sized oil and gas businesses. “Without any such assistance, the United States risks the loss of hundreds of thousands of Americans jobs and irreparable damage to our domestic energy infrastructure,” Cruz said.
Oil industry leaders say the need for targeted assistance is urgent.
“Without a serious lifeline, hundreds of thousands of offshore energy jobs could disappear, unraveling the fabric of countless Gulf Coast communities,” said Erik Milito, head of the National Ocean Industries Association that represents offshore oil and wind developers and support companies.
The Federal Reserve Act prevents the central bank from loaning to insolvent companies, though earlier this month itsaid it would loan to companies that had suffered a downgrade from investment-grade quality before March 22.
So far, Mnuchin indicates that in order to tap the Fed for help, oil companies would need to “fit into the normal constraints” that the central bank applies.
— With assistance by Rachel Adams-Heard, and Carlos Caminada
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