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GEM November Speaker Series: Commodity Transactions in Distress: An Alphabet Soup of Preventive Medicine

December 1, 2012
C  Freedgood

Charles O. Freedgood

“Commodity Transactions in Distress: An Alphabet Soup of Preventive Medicine” was the topic of GEM’s November Speaker Series featuring Charles O. Freedgood, Managing Director at JPMorgan Chase Bank.

Freedgood gave an overview, from a banker’s perspective, on the types of lending arrangements with oil companies, how they are structured, and an overlay of the bankruptcy elements. He also explained several financing alternatives such as reserve based lending, asset based loans, and forward contracts such as hedging and supply.

“Based on the structure, and terms of each one of these different kinds of arrangements the outcome will be different,” Freedgood said. “If you have only one takeaway after the hour is that the terms and structure of these different types of facilities will result in different outcomes based on the kinds of assets that underlie them, the kinds of provisions that are in them, and what actions people take

to protect themselves.”

Reserve based lending, a commonly used technique for financing oil and gas assets that are already in production, is the practice of offering corporate loans secured by the underlying reserves, and may include a variety of terms and conditions tied to the company’s operations.

Asset based loans are secured revolving credit facilities that are committed to by banks and other traditional commercial finance lenders. Typical candidates for asset based loans are borrowers who have significant asset value and may not generate sufficient cash flow to support a larger cash-flow type facility. In the event of a bankruptcy, the automatic stay becomes effective and the lender cannot enforce its liens on the collateral. However, in order for the debtor to use the collateral it must provide adequate protection to the lender.

Forward contracts are contracts used to purchase, sell, or transfer a commodity with a maturity date. Commodities captured under these types of arrangements include: natural gas, crude oil, refined products, coal, electricity, agricultural products, metals, emissions and weather. The rights under a forward contract are limited to only the ones which it specifically includes or has under law. If a forward contract does not contain a provision that allows for termination upon a bankruptcy filing, then the contract may not be terminated upon a bankruptcy filing.

The GEM Speaker Series are presented by the Global Energy Management Program at the University of Colorado Denver Business School. The series delivers free professional development seminars featuring top energy experts discussing the latest issues and topics relevant to the industry today.

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