Why Shale Oil’s Safety Net Is About to Expire.

Halcon Resources Corp. almost ran into trouble with its banks in June 2013. And again in March 2014. And in February 2015.

Each time, the shale driller came close to violating debt limits set by its lenders, endangering a credit line that provided as much as $1.05 billion in much-needed cash. Each time, Halcon’s banks, led by JPMorgan Chase & Co. and Wells Fargo & Co., loosened their restrictions, allowing Halcon to keep borrowing.

That kind of patience may be coming to an end. Bank regulators have issued warnings on the risks involved in lending to U.S. drillers, threatening a cash crunch in an industry that’s more dependent than ever on other people’s money. Wall Street has been one of the biggest allies of the shale revolution, bankrolling thousands of wells from Texas to North Dakota. The question is how that will change with oil prices down by half since last year to $50.36 a barrel.

“Lenders in general are increasing pressure on oil companies either to raise more equity or do some sort of transaction to pay down their credit lines and free up extra cash,” said Jimmy Vallee, a partner in the energy mergers and acquisitions practice at law firm Paul Hastings LLP in Houston.

Next Re-evaluation

Shale drillers raising cash chart

Banks are already preparing for the next re-evaluation of oil and gas credit lines, reviews which typically take place twice a year in April and October. The loans are based on the value of drillers’ producing reserves, which has shrunk as oil prices fell. Many companies are also losing protection as hedges that locked in prices as high as $90 a barrel begin to expire.

“There’s another redetermination cycle in the fall,” Marianne Lake, chief financial officer at JPMorgan in New York, said July 14 during a conference call to discuss the company’s earnings. “And I’m not going to say likely but it’s possible we’ll be selectively downgrading some clients.”

Banks so far have been willing to keep the money flowing because drillers that come close to maxing out their credit lines have paid them off by tapping public markets. U.S. producers have raised about $44 billion through bonds and share sales in the first half of this year, the most since 2007, according to data compiled by Bloomberg and UBS Group AG.

Debt Appetite

Now the appetite for that debt is dwindling. Bonds have become more expensive and are laden with more onerous terms, including liens against drillers’ oil and gas assets. The average coupon has increased to 6.84 percent in 2015 from 6.36 percent in 2014, according to data compiled by Bloomberg.

Some of the bonds issued this year are already trading at levels indicating financial distress, including $1.25 billion issued last month by SandRidge Energy Inc. More than $22 billion out of the $235 billion in debt owed by the 62 companies in the Bloomberg North America Independent Explorers and Producers index is trading at distressed levels. Their yields are more than 10 percentage points above U.S. Treasuries, as investors demand higher rates to compensate for the risk they won’t be repaid.

Halcon swapped some of its debt for shares this year to help reduce borrowing costs, leaving some bondholders with stock that was worth less than they were owed. The company also issued a $700 million second-lien bond in May.

Banks are already preparing for the next reevaluation of oil and gas credit lines, reviews which typically take place twice a year in April and October. Photographer: Eddie Seal/Bloomberg

Banks are already preparing for the next reevaluation of oil and gas credit lines, reviews which typically take place twice a year in April and October. Photographer: Eddie Seal/Bloomberg

 

Default Leftovers

In the event of a Halcon default, Standard & Poor’s estimates that unsecured bondholders would get, at most, 10 percent of the almost $2.6 billion they are owed. Banks have first dibs on most of the company’s assets. Other investors will get next to nothing. Even so, banks aren’t eager to take over drilling the oilfields themselves.

“They certainly don’t want to push anybody over the edge because the last thing the banks want to do is to try to run a company,” said Robert Gray, a partner at law firm Mayer Brown LLP who has worked on company restructuring.

Banks are under pressure from regulators to more frequently review their energy lending and cut back credit lines as the value of collateral drops. In April, the U.S. Office of the Comptroller of the Currency flagged oil and gas loans as one of the lending industry’s biggest emerging risks.

Wells Fargo saw a $416 million increase in past-due loans in the second quarter, most of them energy-related, the company said in a July 14 presentation. The impact is “relatively immaterial,” CFO John Shrewsberry said.

JPMorgan set aside $140 million to cover potential losses on oil and gas loans, Lake, the CFO, said during the bank’s conference call.

“For the weaker companies, it could be very, very painful,” Vallee, the partner at Paul Hastings, said of the potential downgrades. “Some of them are essentially running on fumes.”

Bloomber’s link to: Wall Street Lenders Growing Impatient With U.S. Shale Revolution by Asjylyn Loder, Bradley Olson and Dawn Kopecki

European Banks At Risk Of Bail-Ins In 2015 – Moody’s and S&P Warn

Credit ratings agencies’ frequent warnings regarding bail-ins in recent months have largely been ignored.

“Europe’s banks are vulnerable in 2015 due to weak macroeconomic conditions, unfinished regulatory hurdles and the risk of bail-ins” according to credit rating agencies.

Bank Bail-ins

In March of this year, credit rating agency Standard and Poor’s (S&P) warned that the move towards “bail-ins” and away from “bailouts” continues to evolve and pose risks to European banks and their credit ratings.

Bank of England plans to make bondholders and depositors bear the cost of bailing out failing banks, led Moody’s to downgrade its outlook on the UK banking sector this August. The rating agency said that it had changed its outlook for the UK financial system from “stable” to “negative”, citing the developing global “bail in regime” of creditor and depositor bail-in.

Moody’s have warned of bail-ins numerous times in recent months. In June of this year, Moody’s cut the outlook for Canadian bank debt to negative over the new ‘bail-in’ regime.

Depositors in some Cyprus banks saw 50% or more of their life savings confiscated overnight.

image

The truth is that banks in most western nations are vulnerable to bail-ins in 2015 and the recent G20 meeting in Brisbane was a further move towards the stealth bail-in regimes.

Continue reading here: European Banks At Risk Of Bail-Ins In 2015 – Moody’s and S&P Warn.

Unreported foreign accounts face penalties of 50% of the historical high balance of the account!

“If you have an unreported foreign account, time is quickly running out to comply. There are amnesty options available but only for those who act quickly. Do nothing and you could face penalties of 50% of the historical high balance of the account.”

Hong Kong Signs FATCA Pact

china-flag fatca

The U.S. Treasury Department has confirmed that Hong Kong has signed an agreement to report certain financial account information directly to the IRS. Under the 2010 FATCA law (Foreign Account Tax Compliance Act), foreign banks must review their accounts and report any accounts with ties to the United States. Banks that fail to comply are subject to high withholding taxes and may find it difficult to continue to do business in global markets.

Over 40 countries have signed formal FATCA agreements with dozens more under negotiation. Hong Kong’s agreement, however, is a bit unusual. Most countries have crafted agreements that require the financial institution to report information to that institution’s domestic tax authority, which in turn sends it to the IRS. Many foreign countries are reluctant to have banks providing information directly to the United States.

Hong Kong has elected to join Bermuda, Austria, Japan, Switzerland and Chile as the countries that will require their banks to report directly to the IRS…

Hong Kong Signs FATCA Pact

Financial repression

100 Swiss Banks Get Ultimatum: Hand Over Americans Or Face U.S. Prosecution

Since 2009, the U.S. has had unprecedented success with ferreting out offshore accounts. It started in 2008 with key court victories against UBS. In 2009, UBS paid $780 million to the IRS and upended Swiss banking forever by handing over Americans. Many other banks followed suit, and the costs keep rising. Recently, Credit Suisse plead guilty and paid a $2.6 billion fine.

Now, from its position of dominance, the Justice Department has made it clear what it wants from the hundred Swiss banks that hurriedly grabbed the DOJ’s settlement deal before January 1, 2014. The U.S. seeks ‘total cooperation’, and that truly means total. Any American names, details, and more. The Justice Department intends to get it all.

The consequences of the Swiss not complying? You guessed it: prosecution. There were 14 Swiss banks under criminal investigation that were therefore ineligible for the deal. Such Swiss banks remain under the dark cloud of a U.S. investigation, including Julius Baer, and Pictet & Cie. Approximately 100 banks took the Justice Department settlement deal before the December 31, 2013 deadline.
image But the terms of the non-prosecution agreement were not available until now, 10 months after these 100 banks signed on.There seemed to be little choice about taking the deal, given what was happening to any Swiss bank that even tried to resist. The U.S. settlement deal broke Swiss banks into several categories, with more serious penalties for the worst offenders.

A key group is the category two banks. They have reason to believe they may have committed tax offences, and they can escape prosecution by detailing their wrongdoing with U.S. clients and paying fines. The draft non-prosecution agreement does not involve guilty pleas or criminal penalties.

However, all banks must report to U.S. authorities any information or knowledge of activity relating to U.S. tax. They must reveal all cross-border activities and close the accounts of Americans evading taxes. The 3 tiers of penalties are vastly better than a full-blown U.S. investigation with potential tax evasion charges. Participating banks are required to provide details on American accounts.

They must also inform on the banks that transferred money into secret accounts or that accepted money when secret accounts were closed. See Signed Joint Statement and Program. Banks that held accounts as of August 1, 2008, must pay a fine equal to 20% of the top dollar value of all non-disclosed accounts. That goes up to 30% for secret accounts opened after August 1, 2008, but before March 2009.

The highest tier of penalties is 50% for accounts opened after that. The 3-tier penalty punishes more recent violators most harshly. Of course, American account holders also remain in the cross-hairs. The U.S. settlement program for banks should not be confused with the IRS programs for Americans seeking to avoid prosecution.

Clearly, U.S. account holders who have not already resolved their issues with the IRS should not waste any time determining which IRS offshore amnesty program is right for them. After all, disclosure is now virtually inevitable, and the banks will presumably bend over backwards to comply. If a banks fails to follow any of the terms of the agreement, it would be void. That means the bank could risk U.S. prosecution.

There is little reason to believe that the U.S. authorities are not deadly serious about this. For depositors and banks alike, disclosure and penalties are vastly better than the alternative. And depositors should beware, since closing foreign accounts is not an alternative to coming clean with the IRS. For Americans who fail to step forward, the IRS and Department of Justice warn of their vast resources.

See original source here for more links to this Forbes article.

The crucial implications of FATCA for U.S. Citizens in Hong Kong & Globally including US Air Space!

Cathay to withhold US pilots’ wages for taxes. 

Airline says new laws are forcing it to hand over 30 per cent of salaries to American authorities
Cathay Pacific Airways is to start withholding about 30 per cent of its American pilots’ salary every month and pass the money to the US tax authorities together with the pilots’ personal information this year.

“The US Internal Revenue Service is actively seeking airlines flying into the US to ensure they are fully compliant with all US income tax requirements,” Cathay said. “As an international airline flying into the US, we are working with the IRS on this compliance.”

Yip, an expert on FATCA, said that if Cathay did not comply, the US tax authorities would withhold 30 per cent of its US-source income.

http://www.scmp.com/business/companies/article/1438783/cathay-withhold-us-pilots-wages-taxes

Cathay will start withholding tax from the second quarter of the year.

Cathay will start withholding tax from the second quarter of the year.

A recently signed tax information sharing agreement between the Hong Kong and U.S. governments is an important first step towards a formal, comprehensive intergovernmental agreement (IGA) under the U.S. Foreign Account Tax Compliance Act ( FATCA), said lawyers.

FATCA requires U.S. persons, including those living overseas, to report details of their financial accounts held in other jurisdictions to U.S. tax authorities.
Additionally, foreign financial institutions (FFIs) must report the financial information of their U.S. clients to the Internal Revenue Service (IRS) or face steep penalties.
http://fatca.thomsonreuters.com/wp-content/uploads/2014/04/ASIA-Hong-Kong-U.S.-tax-information-exchange-agreement-signals-a-formal-FATCA-pact.pdf

Last July, the Hong Kong Legislative Council moved to enable Hong Kong to enter into stand-alone Tax Information Exchange Agreements and, more importantly for U.S. persons who have financial accounts there, to sign an “intergovernmental agreement” (IGA) with the U.S. for implementation of the Foreign Account Tax Compliance Act (FATCA).

fatca_hk_us_purpose

FATCA reaches U.S. citizens or residents and entities, such as a corporation or a partnership, in which a U.S. person owns more than a 10% interest.

Beyond the obvious, the reportable accounts include those held in trusts, insurance policies, retirement and stock option plans, and other related foreign structures.

The implications of FATCA, and in particular its withholding and reporting regimes, are wide-ranging for financial institutions, investment entities, and many other global organisations.

— reporting and payment of tax on worldwide income, including investment income earned on financial accounts located outside the U.S.

— disclosure of foreign accounts on tax returns and “FBAR” forms, and of foreign assets on the new Form 8938

— reporting of gifts or bequests from non-U.S. sources, and distributions from and relationships with foreign trusts, as well as interests and certain transactions with foreign corporations and partnerships.

The failure to comply with these requirements can have significant, even potentially catastrophic consequences, including potential criminal prosecution for willful violations and substantial civil money penalties.

A willful FBAR violation can result in a penalty of 50% of the balance of any unreported account(s) per year, and the IRS is increasingly aggressive about this penalty.
Even non-willful conduct can result in substantial monetary sanctions, and the assessment of tax and interest.

– See more at: http://hongkongbusiness.hk/financial-services/commentary/crucial-implications-fatca-us-citizens-in-hong-kong

Who is impacted?

Foreign financial institutions, including Hong Kong based financial institutions and Hong Kong branches of international financial institutions, are all subject to the impending FATCA regime.

Equally impacted are all residents in Hong Kong with U.S. citizenship or U.S. residency status, as the FATCA rules will require compliant financial institutions to disclose their account information to the Internal Revenue Service (IRS).
Additionally, certain non-U.S. account holders will be required to comply with requests from their financial institutions for additional documentation in order to avoid being subject to the 30 percent withholding tax.

Under FATCA, “Foreign financial institutions” (FFIs) include:

  • Banks
  • Private equity funds
  • Hedge funds
  • Institutional investment funds
  • Retirement funds & trusts
  • Insurance companies
  • Securities brokers and dealers

In essence, any non-U.S. organisation that holds, or manages customers’ money is considered an FFI subject to FATCA, irrespective of where it is headquartered or whether or not the shareholding structure is American.

What effect will FATCA have on your business?

Organisations will need to rapidly determine the potential business implications of FATCA and define their compliance strategy accordingly.

Executives should make it a priority to increase their organisation’s FATCA knowledge. 

https://www.kpmg.com/cn/en/services/tax/us-corporate-tax/foreign-account-tax-compliance-act/pages/default.aspx

Scariest Tax Form? Skip It, and IRS Can Audit Forever

Are you a U.S citizen or resident who is an officer or director of a foreign corporation ?
Do you have a company that holds a foreign bank account ?

When a U.S. shareholder holds more than 50 percent of the vote or value of a foreign corporation, the company is a controlled foreign corporation or CFC.

A U.S. shareholder is a U.S. person who owns 10 percent or more of the foreign corporation’s total voting power.

1040 form

That triggers reporting, including filing an annual IRS Form 5471. It is an understatement to say this is an important form. Failing to file it means penalties, generally $10,000 per form. A separate penalty can apply to each Form 5471 filed late, and to each Form 5471 that is incomplete or inaccurate.

What’s more, this penalty can apply even if no tax is due on the return. That seems harsh, but the next rule—about the statute of limitations—is even more surprising. If you have a CFC but fail to file a required Form 5471, your tax return remains open for audit indefinitely. Normally, the statute expires after three or six years, depending on the issue and its magnitude.

This statutory override of the normal statute of limitations is sweeping. The IRS not only has an indefinite period to examine and assess taxes on items relating to the missing Form 5471. In fact, the IRS can make any adjustments to the entire tax return with no expiration until the required Form 5471 is filed. You might think of a Form 5471 like the signature on your return. Without it, it really isn’t a return.

And don’t assume that you have no issue if there is no CFC because U.S. shareholders don’t own over 50%. In fact, Forms 5471 are not only required of U.S. shareholders in CFCs. They are also required when a U.S. shareholder acquires stock that results in 10 percent ownership in any foreign company.

The harsh statute of limitation rule for Form 5471 was the result of the HIRE Act passed March 18, 2010. Not coincidentally, this was the same law that brought us FATCA, the Foreign Account Tax Compliance Act. Bottom line: be careful with CFCs and with Form 5471. The possibility that a statute will remain open can ruin more than your day.

Whats New: Filers of Form 5471 may be subject to net investment income tax on income from CFCs controlled foreign corporations.

This problem is commonly paired with other failings, such as the filing of foreign bank account forms known as FBARs. That means the potential for large civil penalties and perhaps even criminal liability can be palpable.

This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.
Forbes Article Source: http://www.forbes.com/sites/robertwood/2014/03/03/scariest-tax-form-skip-it-and-irs-can-audit-forever/