When the bank’s credit terms get tough, their credit goes to…high-yield applicants? Fitch Ratings analyst Mark Sadeghian and team have found that some investment-grade energy-industry debtors have had their revolving-facility capacity pulled back, while some high-yield debt issuers (all refiners) have had theirs increased. “As has been well documented, declining home prices and the related credit deterioration across a range of mortgage-related assets have put considerable pressure on the banking sector, leading banks to become more selective in extending credit to corporate clients” says Sadeghian. “As a result, some energy issuers have had difficulty rolling over all of their commitments on bank revolvers under existing terms. “While we believe the difficulty in extending revolver commitments among selective issuers in the energy sector says more about the state of the banks extending the credit than it does about their corporate clients, it nonetheless underscores how problems in the credit and capital markets ripple through the financial system and can potentially affect the liquidity of corporate issuers.” E&P and related companies whose bank lines have been reduced include Apache Corp. (it’s two largest revolvers, a $1.5-billion one and one for $450 million, were renewed at $1.45 billion and $410 million, respectively); Devon Energy Corp. (its revolver was renewed at only $2.0 billion, from $2.5 billion); Hess Corp. (a small portion of its $3-billion revolver was not renewed); Marathon Oil Co. (some $2.6 billion of $3-billion facility was extended); Occidental Petroleum Corp. (its $1.5-billion facility was renewed at $1.4 billion.); Noble Corp., the drilling company, renewed its $575-million facility that had been $600 million. “The credit crunch, combined with major banks’ reserve building and focus on their own liquidity cushions, appears to have reduced their appetite to extend credit to corporate clients, particularly credit facilities that would have been sold onward to third-party investors this time last year. “The result has been a trend of selective reductions in revolver commitments in the energy sector. Although the reductions remain somewhat anecdotal in nature, a few tentative patterns are beginning to form.” One is a reduction in investment-grade rather than high-yield energy credits, “possibly because the risk-reward balance may have skewed toward high yield given the widening spreads between the two.” Another is that reductions are generally taking place among unsecured revolvers rather than secured revolvers. He concludes, “While it is somewhat counterintuitive that banks would fail to roll over full commitments in energy given its strong cash flows and credit-protection metrics, the cost of bank capital created by the ongoing wave of write-downs may have forced lenders to tighten their returns-based capital allocations. “Given the widening spreads between high yield and investment grade issuances, high yield may have a more attractive risk-reward ratio at this point. For example, as of early July, U.S. corporate bond spreads for ‘BBB’-rated industrials were quoted at 240 basis points over Treasuries, versus 468 basis points for ‘BB’ Industrials, a spread of 228 basis points. “The spread difference last July was just 76 basis points.” Sadeghian can be reached at mark.sadeghian@fitchratings.com. Contributing to the report are Sean T. Sexton (sean.sexton@fitchratings.com) and Adam M. Miller (adam.miller@fitchratings.com). –Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com; ndarbonne@hartenergy.com