Canadian banks signal that Redwater decision now weighs on oilpatch loans

A recent landmark Supreme Court ruling upholding environmental rights is a new wrinkle influencing how wide Canada's banks open their wallets when lending to the oilpatch.

The Canadian Bankers Association (CBA), which represents Canada’s “big five” banks and dozens of others, said the industry “respects” a Jan. 31 Supreme Court of Canada decision that prioritized cleaning up environmental liabilities over repaying loans.

While the organization told National Observer that banks “remain committed” to working with fossil fuel firms, they also said banks must take "anything" into account in decisions about how much money to loan, and at what price.

“Member banks of the CBA each follow their own lending practices; however, all banks in Canada must adhere to strict regulations that require them to manage risk in their lending,” said Mathieu Labrèche, director of media strategy at the bankers association, in response to questions.

“Anything that impacts the ability of a borrower to fully repay a loan must be factored into the decision about the amount and pricing of a loan.”

Spreading to other parts of the oilpatch?

The ruling is a win for the environment, as the receiver involved in the case had sought to “disclaim” abandoned wells and sell off only productive assets. Now, lenders can no longer expect this method to be used when they consider the likelihood of being made whole down the line.

In a pair of reports Monday, credit rating agency Moody's Investors Service said the ruling could mean banks will be less willing to lend to oil and gas producers, because they may now expect to recover less of their loans if firms go belly up.

The court decision was “credit negative for these companies and for banks,” Moody’s said. “For Canadian banks and other creditors, whose claims would be superseded by the need to fulfil environmental regulations, recovery rates would be reduced in the event that an oil and gas producer goes into default.”

While the agency believed banks already accounted for environmental costs in their decision to issue loans, the court ruling could have the “unintended consequence” of restricting credit availability to smaller oil and gas producers, said Moody's senior vice president David Beattie in a statement.

The decision could also spread to other parts of the oil and gas industry, or other industrial sectors, Moody’s added, and bankruptcy trustees in other Canadian provinces may wind up following similar regulations.

Financial firms play a big role in bolstering Canada's fossil fuel industry. Canadian publicly traded financial institutions make up 31 per cent of total market capitalization and are a "key lender" to the oil and gas sector, itself the second most important sector in capital markets, according to the International Institute for Sustainable Development (IISD).

The bankers association had intervened in the court case in favour of the status quo. The group includes the "big five" largest banks in Canada: BMO Financial Group, TD Bank Group, Royal Bank of Canada, The Bank of Nova Scotia and CIBC. It also represents National Bank, Laurentian Bank, Manulife Bank and others.

The banks had argued throughout the case that they should not be held personally liable for energy firms’ activities. "'Polluter pays' doesn't mean polluter's lender pays,” the association’s lawyer Howard Gorman told media, “It means what it says: the polluter pays."

The Canadian Association of Insolvency and Restructuring Professionals had similarly argued that if the Alberta Energy Regulator was allowed to impose liability on receivers, as the court has allowed, they would be less likely to take on insolvent firms.

Alberta Energy Minister Marg McCuaig-Boyd has said that the provincial NDP government is still reviewing how to crack down on a growing stack of financial liabilities in the oilpatch. These liabilities could be as high as $260 billion, based on internal research by the regulator.

This research was released last fall to National Observer in response to a freedom of information request. The internal documents also revealed a senior executive at the regulator has been pressing for stronger regulations to avoid leaving taxpayers on the hook for the clean up bill for abandoned oilpatch facilities.

Much of Canada's retirement savings, pension funds and defined pension benefit programs are also connected to oil and gas equity shares, debt and company obligations, the IISD revealed in January. Once the implications of the Paris climate agreement are "fully priced into the market," it stated, debt limits could be triggered by companies and bank capitalization would be threatened.

National Observer asked a series of questions to the bankers association, addressing whether it believed Moody's assessments were likely to occur and if so, to what degree.

Labrèche said the group “will not comment on the substance of the Moody's analysis of this case.” He said the answer he provided “is a reply to your questions as a whole, taken together, and provides the banking industry's comment on the (Supreme Court) ruling, not the analysis by Moody's.”

"The banking industry respects the Supreme Court of Canada’s decision,” said Labrèche. “The CBA intervened in this case and argued to preserve the careful balance that has been achieved over many years in bankruptcy and insolvency law, which helps to ensure that the rights of various stakeholders can be met while also helping borrowers access reasonably priced credit to sustain operations, grow and be successful.

“Banks remain committed to working with the resource sector and are confident that they will continue supporting this vital part of Canada’s economy."