HSBC Holdings Plc (HSBC) will be taking a loss from a small energy company in Dublin. The lender was part of a group of banks that extended $500 million in 2013 to Petroceltic International Plc (LON: PCI) to help the gas and oil explorer develop its gas field in Algeria. With the company facing a slump in oil prices and tied in a feud with an activist shareholder, HSBC will be selling its loans at just 30% of its face value.
The bank’s tainted relationship with a client it once praised on its website highlights the effects of the energy lending bust caused by falling oil prices.
European lenders say that a large percentage of their loans are given to industry leaders that have the means to ride out the slump, but there is still $113 billion in lending to minnows, Bank of America Corp. (BAC) analysts note.
Petroceltic has already applied for protection from its creditors through Ireland’s equivalent of Chapter 11 bankruptcy. Activist shareholder Worldview Capital Management LLP purchased the majority of the $233 million of remaining debts the day after Petroceltic filed for protection. The debts were purchased from International Finance Corp. and HSBC.
Worldview, controlled by former Deutsche Bank trader Angelo Moskov, paid 30 cents on the dollar for Petroceltic’s loans. The purchase inflicted a $112 million loss on HSBC and IFC.
Petroceltic’s unraveling demonstrates just how much European banks may potentially lose among small gas and oil companies that focus exclusively on production and exploration. Nearly 35% of these companies, about 175 of them publicly traded, are considered “high risk” and have over $150 billion in debt.
Of HSBC’s $29 billion gas and oil exposure, $5 billion is to producers. Last year, the bank took charges totaling $300 million against energy loans. Another $200 million was added to the reserves as oil prices remained low. Stuart Gulliver, CEO, has stated that the sector is currently under “enhanced monitoring.”