Submitted by Taps Coogan on the 10th of March 2020 to The Sounding Line.

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Chris Whalen, Whalen Global Advisors Chairman, recently spoke with CNBC about the collapse in oil prices and the implications that it has for banks and private equity firms that have exposure to the sector. He warns that it is “physically impossible” for regulators to downgrade companies fast enough given the speed of the recent selloff, implying, not too surprisingly, that extensive downgrades are still to come.

Some excerpts from Chris Whalen:

“(Banks) have been very cautious about energy because their bias is on the downside… In 2015-2016 I was still at Kroll Bond Ratings and we were waiting for the apocalypse. We had half a dozen significant energy lenders in the ratings portfolio and it didn’t happen. Why? Because the private equity guys rode to the rescue. So, the question is: are we going to see private equity double down again, recap those credit lines again and enable these companies to continue? Or, are they going to go into default, because either scenario is reasonable. You don’t know… There is still a lot of demand for energy in the private equity world. I would think they are going to look really hard, especially given some of these valuations. You can dictate terms now. But I don’t think the banks have huge exposure. There is, of course, somebody out there that has made too many energy loans. But I think they are so chastened by past experience and especially the near miss in 2015-2016 that they would probably be more cautious about it…”

“There were hundred of companies, hundreds of governments that were downgraded last week. The rating agencies haven’t caught up with this yet. So that uncertainty is going to remain in the market and if you have the clarity to say ‘No, there is value here’ you can do a lot of buying here…”

“It’s physically impossible for (rating agencies) to react quickly when you have this many obligors who have had their fundamentals changed in two weeks…”

Energy looks fantastically cheap at these levels but to sustainably balance the market, some marginal producers need to go out of business. A wave of downgrades ought to be a step in that direction.

There is more to the interview, so enjoy it above.

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