Banks Are Worried About Some Of This ETF's Holdings

As was widely noted last year, one of the most significant headwinds faced by the U.S. high-yield corporate debt market and the corresponding exchange-traded funds was oil. Tumbling oil prices drained the financial positions of an array of mid- and small-cap shale producers, prompting scores of credit downgrades and sparking concerns over a spate of defaults.

Those concerns have not ebbed early in 2016. With oil prices residing at multi-year lows, default concerns continue looming large throughout the U.S. shale patch. In fact, some banks that lend to shale producers are tightening liquidity requirements, which could be seen as a sign these lenders don't want to be left with nothing if their borrowers go bankrupt.

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“One good place to get an answer is to find which companies' bankers are quietly tightening the liquidity noose (because they don't want to be stuck holding worthless assets in bankruptcy or for whatever other reason), by quietly reducing the borrowing base on existing credit facilities,” according to ZeroHedge.

The ZeroHedge piece highlights “25 deeply distressed companies, whose banks we found have quietly shrunk the borrowing base of their credit facilities anywhere from 6 percent in the case of Black Ridge Oil and Gas to a whopping 51 percent for soon to be insolvent New Source Energy Partners.”

This could be bad news for a host of ETFs, but the already downtrodden First Trust ISE-Revere Natural Gas (ETF) FCG could be particularly vulnerable to the trend of lenders putting the screws to shale borrowers.

FCG And Its Distressed Shale Producers Holdings

The $151.3 million FCG is home to just 31 stocks, but several are among the 25 distressed shale producers highlighted by ZeroHedge. That group includes EXCO Resources Inc XCO, FCG's second-largest holding. Linn Energy LLC LINE and SM Energy Co SM, which combine for over 6 percent of FCG's weight, are also among the 25 distressed shale producers.

That is bad news for FCG, an ETF that has shed nearly three-quarters of its value over the past three years, a loss that is almost five times worse than that of the Energy Select Sector SPDR (ETF) XLE over the same period.

In the near-term, FCG has another issue to contend: slack energy sector earnings growth. By some estimates, the sector's third-quarter earnings are expected to falter by 60 percent or more. Perhaps that is already baked into FCG, an ETF clinging to a $4 handle.

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