Nissa Darbonne, executive editor-at-large, Hart Energy: Hi, thank you for joining us. I'm Nissa Darbonne, executive editor-at-large for Hart Energy. We're visiting with Jamie Brodsky. Jamie is co-CEO and managing partner of Breakwall Capital, a growing first-lien term lender to energy companies.

Jamie, first thank you for joining us. I wanted to ask what types of E&Ps are looking for term loans versus RBLs in lieu of stretching their RBLs [reserve-based lending], adding a first-lien term loan.

Jamie Brodksy, managing partner and co-CEO, Breakwall Capital LP: So a bit of a nuanced answer to what appears to be a simple question, but assuming you've got a functioning RBL market, which is not always the case, and we've seen meaningful retrenchment in the last handful of years, I think it's gotten healthier over time. But coming out of COVID, it was a pretty difficult period for RBL lending banks.

And specifically when you put the challenges during the COVID period on top of all the ESG pressures, saw a lot of banks walking back. And so what used to be kind of a very reliable capital source became less reliable. Right?

So, companies or upstream companies that are looking for a more reliable capital solution didn't necessarily have access to that [and] don't necessarily have access to that today. In addition, there used to be more, I'd say leeway with how RBL banks and lenders operated, giving you more capacity or more ability to stretch to a certain extent to do some development, what have you.

I think lending standards have gotten a lot tighter. I think the amount of banks that are available or are in the RBL business has decreased materially, and so. Therefore it leaves borrowers with decisions to make.

So to the extent you can get an RBL and the banks are willing to lend to you, typically, you'll take it. It's the best cost of capital. However, if you're looking for something more stretch, if you're looking for something whereby you want access to capital for your production, but also your development program, that's where folks like us can come in. And that's where we can compete with the RBL banks because we are, I would say a stretchier piece of paper with a bit more flexibility with less kind of "black box mentality," whereby every quarter we could reevaluate your borrowing base and kind of move the deck chairs.

So "it depends" is the answer, as it typically is, but better, bigger, well-heeled companies will typically use RBLs like they always have in the past. More development companies will come to folks like us and our type of capital can bridge them to a point where they can access the RBL market and some more permanent types of capital like high yield or what have you.

ND: Well, you mentioned what became the commercial lending to E&P space in, during and coming out of COVID? I mean, the numbers became very few. I've been seeing the number of lenders increase. Now at first in 2020, the story I was seeing and hearing was that "commercial lenders are not lending any more to E&P. They're maintaining their existing accounts, but not issuing new relationships. They're not doing new deals for 'ESG reasons.'"

But I mean I've seen them come right back. I think it was just, I mean, commodity markets were awful. They were just awful. So which way do you feel about it? Was there real "ESG and we're never going back to oil and gas" or is it "ESG, but don't count us out just yet?"

JB: I think it's twofold. In my past working at banks specifically at UBS, myself, my partner, we helped set up an RBL-lending business at UBS, effectively. And what was great about the RBL product is that from a loss given default perspective, it was incredibly low.

And so from a capital charge perspective, banks loved it. And so they would extend a lot of credit to upstream companies.

Well, what ultimately happened between sort of COVID or sort of a period where performance wasn't great, plus ESG, not only did you have these sort of external pressures around green climate, what have you, but you also had defaults. And you also had more losses than you have had historically.

So those things when put together made it much more difficult for banks to extend capital because the capital charge went up. You had OCC [U.S. Office of the Comptroller of the Currency] guidelines that have changed, that made the capital charge for energy go up.

And so all those things coupled, made it difficult.

Now you referenced banks coming back—without a doubt. I mean, I think commercial banks specifically are in the lending business and they're also in the client business. And I think what we've seen is, companies that get access to bank capital or to revolver capital, typically banks are looking for additional business that comes along with it.

So whether it's high-yield capital markets, you name it, good clients or they're just really good companies, I think you will continue to see if the markets remain healthy, more and more banks come back. Will it get to where it was?

I'm skeptical that it will, and in addition, I think we're very vulnerable to yet another commodity downturn or something whereby there are a lot of losses, like we saw throughout the COVID period and other times, and then the banks being quicker to retrench.

So I think it's going to ebb and flow based on performance, based on losses. I don't believe there will be as much capital coming from banks as there has been historically, which again makes a nice opportunity for folks like us to step in.

ND: So when is that going to happen?

JB: Us stepping in?

ND: For commodity prices to collapse again.

JB: I don't know. Listen, I'm not a prognosticator ... And we team up specifically on the upstream side. We have a great relationship with Vitol. We have a fund with Vitol called Valor Upstream Credit Partners. We put our collective views together on what are the right assets to ultimately lend to without picking sort of a price and a time when commodities may sort of ebb and flow.

What we look to do is we look to structure our loans so that we're no more than 60% through the value of an asset. And we stress test that for different commodity price environments, different cost environments like you would do in any credit analysis. And we put structural protections around it such that it can withstand downturns. And then we use regular portfolio sort of discipline whereby we don't get over levered to oil or over levered to gas or over levered to any one basin.

Because downturns will come. And sure as I am about anything, I will not have a say in when those downturns come. You probably won't either, although you may have more say than I do. And so taking that into account, you need to structure accordingly, and that's why we come at it from the expectation that you will have this volatility. So that's where we draw the line at our 60% LTV [loan-to-value ratio]. That's why we focus mainly on short-duration lending. We don't do covenant-lite loans. We're always looking at the asset value and measuring accordingly. So we're always at the table because we're chasing that same loss given default, that historical loss given default that lenders have always liked with energy. But we're also trying to create a product that's more desirable than what the banks have been able to give. So it's that stretch of your piece of capital, but we're also charging three or four times.

ND: Thank you, Jamie.

JB: Welcome.

ND: And thank you for joining us. Stay tuned here at hartenergy.com for more energy industry actionable intelligence.

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