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Junk Firms Find the Availability of Cheap Debt Waning

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XLE’s leaders and laggards

As we saw in the previous part, refiners and equipment and services were the worst-performing and best-performing subsectors, respectively, of the Energy Select Sector SPDR ETF (XLE) in the week ended August 28. Valero Energy (VLO) and Phillips 66 (PSX) were the worst- and best-performing stocks among refiners, respectively, and Schlumberger (SLB) and Cameron International (CAM) were the worst- and best-performing stocks on the equipment and services subsector, respectively.

Together, these firms account for 13.8% of XLE. Cameron experienced a sharp rise in its share price following an acquisition agreement with Schlumberger.

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Junk bond issuance at multiyear low

Corporate borrowers of poor credit quality are finding that their access to easy credit is vanishing. According to industry experts, firms that are trying to come into this market are struggling to find favorable terms from buyers.

Investors have lost their appetite for energy firms just when these firms need to refinance credit lines taken when oil prices were more than double their present levels.

Bad timing with looming revaluation of credit lines in October

Until now, energy drilling firms were offering bonds for postponing a cash deficit. These firms could witness greatly reduced access to debt capital markets. This is highly likely given the reevaluation of credit lines offered to energy firms by banks in October.

These firms’ producing reserves determine the loans offered to them. However, borrowing conditions are reportedly still conducive for several high-yield issuers in the US.

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