Capital markets remain open, a boon to MLP growth

Part 3
Capital markets remain open, a boon to MLP growth (Part 3 of 3)

MLP cost of debt roughly flat through 3Q with Fed taper unlikely

Debt yields were broadly flat over 3Q13

Over 3Q13, the cost of debt across most of the MLP spectrum was roughly flat. For example, in the large cap space Enterprise Products Partners (EPD) 5.25% Notes due 2020 were yielding roughly ~3.3% at the end of September, compared to ~3.3% at the end of June. The yield on Plains All American Pipeline’s (PAA) 5% Notes due 2021 was ~3.6% at the end of September, compared to ~3.5% at the end of June. The yield on Kinder Morgan Energy Partners (KMP) 6.85% Notes due 2020 was ~3.6% at the end of September, compared to ~3.6% at the end of June.

2013.10.16 - MLP HG Yields - 2Enlarge Graph

Plus, the cost of debt for most small and mid-cap MLPs was roughly flat over the third quarter. For example, the yield on Targa Resources Partners (NGLS) 6.875% Notes due 2021 was ~5.2% at the end of September, compared to ~5.2% at the end of June. The yield on Genesis Energy’s (GEL) 7.875% Notes due 2018 was ~5.2% at the end of September, compared to ~5.2% at the end of June.

2013.10.16 - MLP HY YieldsEnlarge Graph

Fed tapering not likely in the near term

Investors should note that a reason for the low rates over the past few years has been the Federal Reserve’s stimulus measures, which have lowered interest rates across the board. The Fed has stated that it would seek to curtail these measures once the US economy gained enough strength. When this occurs, interest rates could further increase.

Rates rose through much of 2Q13, as the markets feared that Fed stimulus measures would soon be curtailed. However, recently the Fed has communicated that it would likely keep rates low in the near term. So rates in 3Q13 were largely flattish, and analysts expect that rates will likely not experience much volatility through the end of the year. From a long-term perspective, the cost of debt (the rate of interest for borrowing money) for MLPs is still relatively low.

For more on Market Realist’s thoughts on cost of debt funding, see Will 2013 mean a pullback in high yield bonds?

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