I3 January 2015 HY Corporate Credit Energy In the past what has caused the banks to decrease RBLs for HY issuers,? Overall, since the mid-1990s (start of reliable data), lenders have seen par recovery on RBL facilities in all distressed and bankruptcy situations according to S&P. There are two main reason why this is the case. First, reserve engineers at the major lending banks use a lower price deck than the actual commodity strip price as a base case. And beyond that, the banks run a further sensitivity (aka downside case) that they generally rely on to give them confidence during commodity market dislocations like this one. The second reason banks haven't taken losses on these RBLs is that internal reserve engineers also take a additional discount to the already discounted (9-10%) expected cash flows coming from an E&P's proved reserves. Generally, Proved Developed Producing reserve are discounted at 25%; Proved Developed Non-Producing are discounted at 50%; Proved Undeveloped (PUDs) are discounted at 75%. This is in addition to subtracting out the expected cash flow for the next 6 months of planned production out of the RBL borrowing base. This borrowing base calculation does however give producers the benefit of hedges. Given a lack of material losses in the types of products banks are generally reluctant to materially reduce the RBLs of E&P especially during dislocations like the one we are seeing in oil right now. The general philosophy of the lending banks has been to be more conservative in both directions. When commodities (oil, nat gas) are rallying, banks are slow to move the price deck up; however, the same is true on the way down, which benefits E&Ps in today's bear oil market. That said, borrowing bases were reduced in 08/09, although these reductions were very minor compared to the over 70% decline in oil prices. There have been situations where the banks will reduce borrowing bases more meaningfully. This can happen