Due to unprecedented growth in the unconventional oil and gas plays, excitement is spilling over from the upstream and midstream sectors into the industries that support them. Financial firms, such as Branch Banking and Trust Co., based in Winston-Salem, North Carolina, plan to form new energy divisions or increase the size of existing departments to put investors’ capital to work.

Recently, BB&T Capital Markets (BB&T), a division of Branch Banking and Trust, hired a team of experienced energy lenders to help it expand into energy and further build on its tradition of banking that stretches back to 1872.

“The addition of this team to BB&T’s energy platform is part of a long-term strategy to expand our presence in the oil and gas sector, and represents a significant growth opportunity for us,” says Rufus Yates, chief executive. “We are committed to this strategy of helping our clients access capital.”

The firm’s activities include banking, lending, insurance, trust and wealth-management activities. The bank holds the title of ninth largest U.S. bank, has some $157 billion in assets and a market capitalization of over $18.3 billion. The company operates some 1,800 financial centers in 12 states and in Washington D.C. and has banking, securities, brokerage, asset management, mortgage and insurance activities, and is A+ rated.

“We tell people it’s probably the biggest bank they’ve never heard of,” says Ryan Michael, a senior vice president.

With a plan to expand further into the Texas market, the bank’s managers decided to look for a team of lenders that had some experience working together. The managers would then consider the possibility of hiring the entire team.

BB&T contacted Michael, who worked with five other energy lenders at Sterling Bank & Trust, a Houston-based regional bank with about $5 billion in assets. The six-year-old team had developed an energy portfolio in the upstream and midstream sectors.

“We were treated very well, but we started thinking about what we could do as a team with a larger balance sheet,” Michael says, explaining that Sterling’s balance sheet was strong but it limited the size of the deals they could close.

Meanwhile, in 2009, BB&T acquired Montgomery, Alabama-based bank, Colonial Bank, which had assets in Texas. Colonial was closed in 2009 by the Alabama State Banking Department, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement BB&T to assume all of the deposits of Colonial Bank and to reopen all 346 branches in Alabama, Florida, Georgia, Nevada and Texas to operate as branches of BB&T. At the time, Colonial had total assets of $25 billion and total deposits of about $20 billion.

“As they were integrating the acquisition, management became aware of the attractiveness of the Texas market, in general, and decided that part of BB&T’s strategy was to become a significant player in Texas,” he says. In particular BB&T wanted a strong presence in the energy market. “As fortune would have it, our ambitions were aligned when we met,” Michael says.

"We bank management. Actively calling is absolutely necessary. We call on management teams that we have known from the past, as well as those we haven’t had the pleasure of working with but whose reputations we know." —Ryan Michael, senior vice president, BB&T Capital Markets

Experienced team

In 2010, the team started the long process of negotiating a transfer, which took place in February 2011, when the group became part of BB&T. In addition to Michael, the team includes Jeff Forbis, senior vice president and team leader. He has more than 30 years of energy banking experience and specializes in oil and gas reserve-based and midstream lending for the capital-intensive oil and gas sector.

The third member is David Phillips, a senior vice president, who also has more than 30 years of experience in energy banking. The fourth member, Parul June, is assistant vice president, with 11 years of banking experience and more than five years in energy lending. Cherie Allen, the fifth member, became a corporate banking analyst, and has 21 years of banking experience with seven years in energy.

For the sixth member, BB&T hired a dedicated energy credit officer, David Wesley, who will be housed in Winston-Salem. Wesley has more than 30 years of banking experience with 12 years in the energy sector.

“He is a fantastic resource for us in underwriting and shepherding oil and gas upstream and midstream deals through corporate credit administration in Winston-Salem,” Michael says. “We found that BB&T was a great cultural fit for our team, and we were impressed with the people we met. Also, we were excited about their plans for the bank and their enthusiasm for Texas and for energy lending, and the commitment they were demonstrating to the energy market by hiring the entire team.”

The team has been in place since February and has placed about $300 million in energy companies with another $300 million in the immediate pipeline. BB&T’s initial commitments per customer range from $35- to $75 million in upstream and midstream companies. The team closed two private midstream deals during the second quarter, and is actively pursuing new midstream business. “We are very excited about the possibilities,” he says.

In addition, Michael notes that the division sees opportunity in several bank facility refinancings pending this year. “The return of the midstream mergers-and-acquisitions market looks promising. We’re hoping to see many more opportunities this year,” he says.

Although the team is forging new relationships, it continues to work with past clients. “We’ve been very gratified at how well we’ve been received,” he said.

Lending dynamics

Today, Michael and the rest of the team carefully watch the changing dynamics of the energy-lending industry and see new opportunities rising from past challenges.

“The lending dynamics in the energy industry have changed since the financial crisis of 2008,” he says. “Immediately after the crisis, capital was tight and banks stopped making five-year revolving credit deals, reducing them instead to three years.”

Now, banks have resumed the five-year deals, he says, and notes that the cost of borrowing is relatively low by historical standards. Since mid-2010 to present, borrowers have been taking advantage of the “compression” in the interest-rate spreads for many industries, and the energy sector is no exception.

“Many banks are willing to make secured loans at about LIBOR +100 points. For non-investment grade loans, banks are making loans around LIBOR +150 to 250 points. That is certainly an attractive cost of capital for the industry.”

He believes such spreads with continue “for the foreseeable future.” The long-term fixed income debt market is relatively attractive as well, he says.

As the lending sector has evolved, a typical upstream or revolving credit facility is $750 million or more, and the minimum amount needed to participate in a syndicated transaction has increased from $25- to $50 million—and in some cases is as high as $75 million, he says. Having a larger balance sheet gives BB&T access to additional and larger potential deals.

The Houston-based team has pressed forward with additional lending opportunities in the upstream and midstream sector, gaining direct access to many companies with headquarters in the city, but also operates with a mandate that includes the lower 48.

Because the energy team primarily seeks syndicated transactions, it relies on relationships with other dominant banks and with professional contacts in the energy industry.

“We bank management. Actively calling is absolutely necessary. We call on management teams that we have known from the past, as well as those we haven’t had the pleasure of working with but whose reputations we know,” he says.

In syndicated loans, personal relationships are important. “You can have the best assets in the world and it’s not going to get you very far if you don’t have a really high quality management team in place that you know and trust,” he says. BB&T calls both management companies as well as the agent banks that lead the syndicated loans.

BB&T undertakes lead investments as well as sub-investment-grade loans to companies with market capitalization from $200 million into the billions, and prefers to diversify across geographic basins.

“As midstream creditors, we certainly like to see a significant percentage of their cash flow stream come from fixed-fee contracts. Those that have some insulation from direct commodity prices are better positioned to weather a commodity-price downturn,” Michael says.

BB&T will lend to any segment within the midstream sector with the possible exception of the service and supply segment. “We grew up as reserved-based lenders and we apply a lot of that knowledge to the midstream space,” he says. BB&T will lend to companies which gather, store and process energy commodities. “As creditors, our bias is away from direct or overwhelming amounts of commodity exposure. We seek a healthy balance of fixed tariff, gathering, transport and processing fees," he says.

The near-term prospects for midstream players and their creditors look good for the foreseeable future. BB&T sees ongoing demand in Marcellus and in Eagle Ford Shale. “Right now, in Eagle Ford and Bakken, there are opportunities for bolt-on acquisitions of small gathering systems and new, organic constructions seem to be increasing. For the rest of 2011, we see a lot of growth potential, driven in part by the attractive economics of natural gas liquids processing,” he says.

Potential risks exist in the sector, but not much keeps him awake at night, he says. Some industry players have heard discussions about the risks of removing the tax benefits for master limited partnerships, but that discussion has not held back growth.

“I can’t read Congress’ mind, but I would be surprised if that would happen. Certainly that would change the dynamics of the capital raising landscape. We will have to wait and see,” he says.

With that, BB&T is moving forward aggressively in energy lending. It presents itself as a strong and growing institution and has attracted a lot of attention over the course of a few short months. “We’ve been very engaged during the past few months and we are finding that, in telling BB&T’s story, we are being well received. We are very grateful to be in this business,” Michael says.