Dallas Fed says energy asset-backed securities are reshaping bank lending risk

Federal Reserve Bank of Dallas researchers Sung Je Byun and Matthew T. Monteith examined the banking implications of producers securitizing proved developed producing, or PDP, oil and gas assets in an article published on 15 October. The structure transfers producing assets to special-purpose entities and repays securities from production cash flows. The authors report cumulative issuance of about $20 billion across more than 15 issuers since 2019, still small beside the hundreds of billions of dollars in reserve-based lending commitments.

The authors say traditional reserve-based lenders may be left with a riskier pool of collateral when a producer moves its most stable producing assets into securities, while their facilities may increasingly serve as backup credit lines. They recommend banks adapt collateral assessment, pricing, hedging requirements and monitoring. The article also states that the authors have not observed deterioration in reserve-based lending standards to date; the analysis is their assessment.