Underwriters at Channel discuss its collaboration with SCOR Business Solutions in approaching reserve-based lending.
The Political and Credit Risks team at Channel, a SCOR Group company, has become a trusted partner for corporates, export credit agencies, financial institutions and multilaterals around the world. Channel has mitigated its clients’ exposures in over 130 countries and 40 industries since its inception. The Political and Credit Risks team can support its clients on both Lloyd’s and corporate platforms and has top quartile per risk capacity, allowing it to lead and deliver complex solutions to its clients in this specialty market. In addition, Channel’s clients benefit from the engineering expertise provided by the technical underwriters at SCOR Business Solutions.
SCOR’s approach to reserve-based lending has been developed through close collaboration with its clients and during a challenging period for the oil and gas sector. In the second quarter of 2014, the oil price peaked at US$115 per barrel, but had fallen to below US$35 per barrel one year later. The drivers of this price volatility are well documented, but combination of factors, including but not limited to a strong US dollar and OPEC’s unwillingness to cut production, contributed to it. As the oil price remained subdued, the financial resilience of the independent exploration and production companies were called into question and the industry experienced a number of high-profile insolvencies. Despite the negative press and challenging market conditions, what became clear was the resilience and flexibility of the reserve-based lending structure.
Over recent years, independent exploration and production companies have become more efficient and disciplined, especially with their cash expenditure and exploration activities. The lower oil price environment forced the industry to put more emphasis on projects with low operating costs. Brice Morlot, an underwriter at SCOR Business Solutions, notes: “Almost in tandem, new technologies were brought in by nimble independent exploration and production companies that focused on extending reserve life. This allowed for the North Sea to be back in play, especially following the withdrawal of some of the oil majors, increasing the demand for reserve-based lending.”
Initial concerns around oil majors’ exits from the North Sea were met with renewed optimism following private equity-backed companies stepping in to make significant acquisitions in this basin. Oliver Posgate, an underwriter at Channel, explains this in further detail: “Oil majors are designed for producing oil from fields that require significant upfront capital expenditure and then minimal operating expenditure. The producing fields in the North Sea simply did not have the scale for the oil majors to realise their inherent value.”
In addition to the exit of the oil majors, several utility companies divested their upstream assets at the same time. These utilities acquired producing fields in the 1980s and 1990s in order to provide for a steady supply of natural resources for domestic consumption, but this form of resource nationalism has fallen out of favour and made these upstream assets non-core.
SCOR’s approach to reserve-based lending in the oil and gas sector has been underpinned by breaking down default risk into a number of fundamental factors, including but not limited to financial, reserve and production risks. Where Channel provides a unique area of expertise compared to its peers is in the analysis of production risk. SCOR Business Solutions has in-house engineers who have extensive experience in the oil and gas industry. “As reserve-based lending is based on the future cash flows of producing assets, then the assessment of reserves and operational capacity is crucial,” says Morlot. This technical expertise is then paired with the political risk expertise at Channel. Posgate argues that these more qualitative factors are important: “Changing regulatory frameworks, a variety of production sharing contracts, complex relationships between producers and national governments, and a demanding domestic workforce all collectively make this industry one of the most complex in the world.”
Reserve-based lending and its support by credit insurers is not a new phenomenon, but the collaboration between Channel and SCOR Business Solutions in this segment is unique.
It brings value to clients because they are able to work with an insurer with in-house expertise and a deeper understanding of the nuances of the oil and gas industry. Kade Spears, head of specialty at Channel, explains in further detail: “Our clients are facing regulatory and shareholder headwinds that are forcing them to revaluate how they approach the risks to their businesses. This is having a negative impact on many of their traditional lines of business including reserve-based lending for our financial institution clients. We are in the risk business and have experienced underwriters who are supported with the right analytics. This enables us to define, model and mitigate the risks faced by our clients. The collaboration across Channel and SCOR Business Solutions only reinforces and strengthens our ability to do so.”
Two platforms that can support banking clients on reserve-based lending (RBL) transactions: Channel 2015 at Lloyd’s of London and SCOR UK Company Limited. Both platforms have capacity up to US$35mn per risk and the platforms can be combined to offer up to US$70mn per risk. Maximum tenors of up to 8 years for RBLs.
Onshore Energy & Mining Underwriter
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Assistant Underwriter, Specialty
The Channel Syndicate
10 Lime Street, London, EC3M 7AA
T: +44 (0) 203 817 5082
Divisional Head, Specialty
The Channel Syndicate
10 Lime Street, London, EC3M 7AA
T: +44 (0) 203 535 8198
M: +44 (0) 7551 153519