16 ★ † FINANCIAL TIMES Wednesday18 March 2020
C O M PA N I E S
JA M E S F O N TA N E L L A- K H A N A N D
G R E G O RY M E Y E R— NEW YORK
Chesapeake Energy, a highly indebted
pioneer of the US shale energy industry,
has hired restructuring advisers as the
company has been crippled by
persistently weak natural gas prices
coupled with the collapse of oil prices
and the repercussions of thecoronavi-
ruspandemic.
The Oklahoma City-based company
has hired law firmKirkland & Ellisand
financial advisersRothschild & Coto
help manage its $9bn debt pile while
navigating the crisis, people familiar
with the matter said.
One of the early movers of the
U S s h a l e r e v o l u t i o n , C h e s a -
peakewarnedlate last year it was strug-
gling to operate in a low commodities
prices environment.
Its difficulties were exacerbated by
the oil price war sparked in recent days
by the confrontation between Saudi
Arabia and Russia.
Chesapeake was co-founded by the
lateAubrey McClendonin 1989 and rose
from obscurity to become for a time
the second-largest gas producer in
the US afterExxonMobil. Its shares
closed down almost 33 per cent on
Monday to $0.20.
In after-market trading hours, the
company’s share price dropped a
further 10 per cent after Reuters first
reported it had hired restructuring
advisers. Chesapeake declined to
comment.
Bankers and lawyers advising oil and
gas companies warned there could
be many more forced to consider
going bankrupt to manage their
ballooning debt pile.
“It’s a complete meltdown,” said an
adviser working with multiple
upstream companies considering filing
for Chapter 11 bankruptcy protection.
“Any company that is an E&P [explora-
tion and production] company, other
than the very big ones, is in dan-
ger... unless the government offers
them a bailout package it’s going to be a
disaster.”
The near-collapse of several energy
companies comes in the wake of
the failure of Opec and Russia earlier
t h i s m o n t h t o a g r e e a d e a l o n
cutting production to prop upcrude
prices.
Saudi Arabia wanted to make further
cuts to production, but when Russia
refused, it decided to raise output.
Oil & gas
Chesapeake takes action on $9bn debt pile
Shale energy pioneer hires
restructuring advisers as
crude crash takes toll
L AU R A N O O N A N , ST E P H E N M O R R I S
A N D M A RT I N A R N O L D
New accounting rulesrisk crippling
parts of the banking sector by forcing
earlier recognition of loan lossesas
coronavirusthreatens to push the world
into recession.
“There is a problem with the new
accounting rules,” which would
“increase provisioning in a dramatic
way”,onemember of the European Cen-
tral Bank’s governing councilsaid, refer-
ring to sweeping changes to the way
loans are accounted for.
The adoption of Europe-led account-
ing standard IFRS 9had a “procyclical
effect”, the personsaid, which would
make banks more susceptible to the
highs and lows of economic cycles.
IFRS 9 requires banks to take earlier
provisions for loans going bad, espe-
cially when they crossthresholds such
as a “material change in circumstances”.
It forces banks to take provisions for the
lifetime of a loan.
Meanwhile, US banks have been oper-
ating under a new standarddubbed
“current expected credit losses”since
the start of the year. This requires them
to book lifetime loan losses as soon as
there is reason to believe a loan will not
be repaid in full.
The old method for both jurisdictions
was tobook provisions only when cus-
tomersmissed payments.
“If we were still under an ‘incurred
loss model’, many companies could
likely overlook the current economic
issues as long as the creditors are cur-
rently paying on time,” said Janet Pegg,
an analyst at Zion Research Group, of
the situation in the US.
Despite multiple pledges of capital
relief for the banking system,stock
marketscontinued to sell offthis week
as the eurozone shut its borders, airlines
cancelled tens of thousands of flights,
and factories announced closures.
An index of European and UK banks
has fallen 44 per cent in the past month
to a level last seen in the 1990s. The four
biggest US lenders by assetsfell a fifth
on Monday morning.
Some bank executives said theywere
concerned that higher loan-loss provi-
sionswould absorb much of the capital
relief announced by central banks, leav-
ing little left over to be lent on to compa-
nies seekingemergency credit lines.
“We don’t have hard estimates yet
for the impact... but IFRS 9 will
become a real pain for banks,”one bank
executive said.
Jason Napier, UBS’s head of European
banks research, said the coronavirus
falloutwas “the first real test” of IFRS 9
since it was introduced in 2018.
Kian Abouhossein, an analyst at
JPMorgan, said the changemeant that
about 50 per cent of total loan losses
would come in the first year, whereas
historically 60 per cent of loan losses
were spread over the first two years.
There are alreadysigns of a back-
lash. The Association of German Banks
has started lobbying for a “more flexible
handling” of risk provisions under IFRS
9, and has warnedthat the existing
accounting rules could “massively
amplify” the looming crisis. Under the
current regime, German lenders would
be exposed to “excessive risk provisions
and capital needs”, it said.
Jérôme Legras, head of research at
Axiom Alternative Investments, said
the ECB had done a “good job” with its
relief and stimulus package last week,
but “it’s only halfway there.They need
to talk about the loans.Someone needs
to say in a very clear way, ‘We are not
doing IFRS 9 for the next year or so.’”
However,Mr Abouhossein cautioned:
“To make accounting rules suddenly
flexible for certain periods... reduces
the confidence in the system.”
Felix Hufeld, head of Germany’s
banking watchdog BaFin, on Monday
said European regulators did not think
the present situation merited the sof-
tening of regulatory requirements. But
he said watchdogswould act “in a highly
flexible way”, in particular with regard
to capital requirements.
One European banking executive
said: “IFRS 9: I hate it as a rule, but
relaxing accounting standards in a crisis
just doesn’t look right.”
The difference in accounting
approach is likely to bepronounced in
the energy sector, which is reeling from
a slump in the oil price that could result
in a spate of loan losses, said Megan Fox,
an analyst at Moody’s.
Shesaid many banks had hedged this
exposure, meaning thatdefaults come
much later. Under the old regime, loan-
loss provisions would have been pushed
out for a significantperiod.
Research from KBW showed thatCiti-
grouphad the biggest oil and gas expo-
sure of the US banks, with $22.48bn of
outstanding loans, equal to 3.2 per cent
of its loan book.Bank of America’s oil
and gas loans are 1.7 per cent ofloans.
Wells Fargo’s andJPMorgan’s loans to
the sector amount to 1.4 per cent of out-
standing lending.
Additional reporting by Robert Smith
in London
Financials.Provisions
Banks groan under accounting rules burden
IFRS 9 risks crippling parts
of sector by forcing earlier
recognition of loan losses
The ECB’s
headquarters in
Frankfurt.
Sweeping
changes to the
way loans are
accounted for
are said to make
lenders more
susceptible to
the highs
and lows of
economic cycles
Boris Roessler/dpa/AFP/
Getty Images‘I hate it,
but relaxing
standards
in a crisis
just doesn’t
look right’
P E T E R C A M P B E L L, C L A I R E B U S H E Y
A N D J O E M I L L E RPressure is rising on US carmakers to
close plants after a second day of shut-
downs across Europe that included
Britain’s largest car plant,Nissan’s fac-
tory in Sunderland.
The United Auto Workers union in the
USyesterday called for a two-week clo-
sure of plants owned byFord,General
MotorsandFiat Chrysler. Employees
have already triggered temporary pro-
duction halts at factories in the US, Can-
ada and Spain, downing tools over fears
of catching the coronavirus.
While many carmakers have closed
plants across Europe, almost every US
facility remains operational, requiring
production staff to come into work
despite the growing number of cases.
“We are very concerned about it,” said
UAW spokesman Brian Rothenberg.
“We are leaving all options on the table
to protect our members, whatever those
would be. We are committed to making
sure our members aren’t disadvantaged
over this national emergency.”
Ford,Volkswagen,Daimlerand Nis-
san announced further closures across
Europeyesterday, followingRenault,
Fiat,Toyotaand Peugeot ownerPSAon
Monday, as the continent’s industrial
heartland ground to a halt.
Fordyesterday said it would close all
plants in continental Europe from
Thursday, affecting sites in Germany
and Romania but keeping its UK engine
factories open. It has already shut its
Valencia facility in Spain after three
workers were confirmed with coronavi-
rus over the weekend.
In Spain, where almost allcar plants
have shut,Mercedes-Benzwas forced to
stop the line at its van facility in
Gasteiz on Monday after workers staged
asit-infollowing a confirmed case of
coronavirus.
The site is one of those affected by the
German group’s decisionyesterday to
close the majority of its car and van pro-
duction sites across Europe starting this
week, although it would not confirm
which plants would remain open.
“Special emergency operations need
to be continued, like customer service
or safeguarding international supply
chains,”the Mercedes-Benz maker said.
In the US, while backroom staffhave
been sent home, production staff are
still being asked to come in to staff their
facilities. The demands for increased
cleanliness, particularly frequent hand
washing, have put the spotlight on con-
ditions in factories that workers say are
unsatisfactory.
Chrysler’s assembly plant in Warren,
Michigan, saw staff in the paint shop on
Monday refuse to work, delaying the
morning shift, while a small but growing
number of employees at the site have
not been turning up for work, several
people who work at the site told the FT.
Automobiles
Workers at
US carmakers
demand
Europe-style
plant closures
‘We are leaving all options
on the table to protect our
[UAW union] members,
whatever those would be’
Saudi Arabia’s rift with Moscow has
exacerbated the company’s woes
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UK: +44 20 7873 4000 | Email:MARCH 18 2020 Section:Companies Time: 17/3/2020-18:40 User:andrea.crisp Page Name:CONEWS3, Part,Page,Edition:EUR, 16 , 1