March 17, 2017 Read More →

Reputational Risk to Dakota Access Pipeline Lenders

It has been a tough year for Wells Fargo: in the third quarter of 2016, it became apparent that since around 2011, its employees had opened up to 1.5 million deposit accounts and issued 500,000 credit card applications for unsuspecting clients, without getting customers’ authorisation. The scandal led to lawsuits, thousands of layoffs and US$190mn in fines and settlement fees.

Around the same time, protests against the construction of the Dakota Access Pipeline escalated, leading to police violence and human rights violations.

This pressure has had some results: various lenders (including Wells Fargo), hired an independent human rights law firm, Foley Hoag, to advise them on the project and and to review various matters related to the permitting process, including compliance with applicable law related to consultations with Native Americans. Some also agreed not to provide any further financings to ETP as a result of the controversy.

Wells Fargo is also one of seven banks (the others are Citi, Crédit Agricole, DNB, ING, Société Générale and TD) that immediately agreed to hold meetings with the Standing Sioux tribe to hear their concerns. In contrast, four banks declined the meetings (BayernLB, BNP Paribas, Mizuho and Suntrust) and six did not respond to the request at all (Bank of Tokyo-Mitsubishi UFJ, BBVA, ICBC, Intesa Sanpaolo, Natixis, and Sumitomo Mitsui Banking Corporation).

But more importantly, Wells Fargo is one of 17 banks involved in the DAPL syndicate and did not take a lead role, representing only 5% of the loan amount. Citi was the lead bank on the transaction, and the Bank of Tokyo Mitsubishu UFJ, Mizuho and TD Securities acted as co-mandated lead arrangers.

Activists for the environment and indigenous rights argue that the pipeline risks damaging sacred burial sites, and polluting waters in the Standing Rock Indian Reservation. They started putting pressure on the bank to stop financing the project and its developer, Energy Transfer Partners.

All of this came to a head in February: Seattle council members Tim Burgess and Kshama Sawant sponsored a bill to pull US$3bn of municipal business from Wells Fargo – representing about US$1mn of profits for the bank. The bill was universally approved by the rest of the council.

The decision, which was copied by a small California town and considered by many others, including New York, raises a number of questions.

First, it was made a little too late: the loan agreement for the Dakota Access Pipeline (DAPL) was signed in August 2016. After that, banks involved in the project were contractually obligated to provide the funds.

If other DAPL lenders are worried about a similar backlash to the one experienced by Wells Fargo, they are not admitting it. GTR’s request for comment on the situation was declined by most of the syndicate, with only BNP Paribas responding with a vague official statement about environmental due diligence.

Most banks have expressed a certain regret about not noticing the risk of controversy before signing the contract.

“The European banks, including ING, came out with letters of support saying they would not provide any new financings. Most of the reactions have been ‘we wished we had known this sooner’. Our reaction has been ‘you signed the Equator Principles, you’re supposed to be competent professionals in due diligence and you should have seen this coming’,” adds Adamson.

She and Frijns at BankTrack believe the one positive effect that could derive from this fiasco would be a change in due diligence processes for such projects, but unless the UN modifies the terms of the Equator Principles, it seems as though banks will continue to deem their adherence to these sufficient.

What banks are most likely concerned about is ETP’s ability to pay them back: a November 2016 joint report by the Institute for Energy Economics and Financial Analysis and the Sightline Institute called the financing “high-risk”, flagging the overbuilding of the Bakken shale oil transport infrastructure at a time when investment in oil itself is dwindling.

ETP missed its project completion deadline of January 1, 2017, after which companies that have committed to ship oil through the pipeline at 2014 prices had the right to rescind those commitments. The report’s authors expect oil shippers to attempt to renegotiate the terms of their contract with ETP based on the oil price decline experienced since they signed it in 2014.

The company is overleveraged, and without the revenue from DAPL, it may well be unable to repay its debtors.

“ETP has been in a phase of rapid, high-risk growth, which has required it to raise capital quickly. Its total assets grew from US$4.4bn in 2005 to US$12.1bn in 2010 and then to US$65.2bn in 2015. In June 2016, Moody’s placed ETP on a ‘negative outlook’ for its high leverage. ETP, in short, is under extreme financial pressure to [ensure] that its investments generate cash for its investors,” the report reads.

Reputational risk in post-truth era: the Wells Fargo saga

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