KKR’s Win-Win Energy Deal Sours, Offers Lesson in Risky Lending
By Sridhar Natarajan

When KKR & Co. swooped in a year ago with a $700 million rescue package for Preferred Sands LLC, it seemed like a win-win solution. Preferred Sands avoided bankruptcy. And KKR beat out some of Wall Street’s biggest lenders, which had balked at debt levels that would be deemed too risky by banking regulators who don’t oversee the private equity firm. A year later, the cost of crude has more than halved from about $100 and the price of the loan is tanking — providing a stark reminder of why regulators have been campaigning against risky lending practices by banks for more than two years. “The question is the extent to which this is occurring and whether or not that creates systemic market risk,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc., a Washington regulatory consulting firm. “Are there enough of these loans out there that could lead to defaults across the sector?”