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The high yield bond and leveraged loan weekly update for investors

Part 2
The high yield bond and leveraged loan weekly update for investors (Part 2 of 6)

Who crowded the market—oil & gas companies or refinancing?

Refinancing

Generally the momentum in refinancing upticks in the environment of lower interest rates, as many corporations takes advantage of low borrowing cost to replace their existing high cost debts. This essentially reduces the interest paid on the debts and boosts the free cash flows of the corporations, which can be used to expand the operational ability, resulting in higher profits. Last week, corporations issued nearly $5.3 billion worth of refinancing deals.

HY by PurposeEnlarge Graph

A large number of low rated bonds, mainly single B rated bonds were issued at the mid to tight ends of the talk, indicating elevated demand with no new deals priced longer than an eight-year tenor.

The largest deal of the week was a $1.8 billion Ba3/BB rated two-part issuance from Bombardier Inc. (TSE). The Canadian-based manufacturer of planes and trains issued $1.2 billion in eight-year notes that were priced to yield 6%, at a spread of 344 basis points over treasuries (344 basis point was the premium paid on the issue). The company also issued $600 million of five-year notes that were priced to yield 4.75%, at a spread of 302 basis points. Both tranches priced at the tight end of the price talk indicated strong demand that pushed both new bond prices higher when freed to trade in the secondary market. The proceeds continue to be used for refinancing.

Other than Bombardier Inc. (TSE), last week was quite heavy for the oil and gas companies who collectively issued $2.7 billion of high yield bonds.

Among the last week’s oil and gas issuers, Tullow Oil plc (TLW), a leading independent oil & gas company with a market capitalization of $12.1 billion, successfully refinanced a $650 million BB-/B1 eight-year senior note to yield 6.25%, at a spread of 366 basis points over treasuries with similar maturity. The proceeds are expected to provide additional flexibility to the company in terms of funding developments, such as the TEN project offshore Ghana. The company is also planning disposal of its assets in the North Sea and a portion of farm-down of TEN, which would add to its cash flow capacity.

NRG Energy, Inc. (NRG) issued $1,000 million senior notes to yield 6.25%, while EnQuest (ENQ), a United Kingdom-based petroleum exploration and production company, raised $500 million eight-year senior notes rated B/B3 for general corporate purpose. Exterran Holdings, Inc. (EXH) with credit rating of B/B1 raised $300 million to yield 6.25% was also in the tight-end of talks.

Forward looking calendar

Expectations are for a reasonably busy calendar for the next week with higher number of mergers and acquisitions. Of the 18 high yield bond (JNK) deals announced for next week, only two are in the refinancing space, and the remaining 16 deals are for M&A and LBOs (leveraged buyouts). The biggest deal to watch will be for AerCap Holdings N.V. (AER), which is expected to transact a $2.7 billion M&A deal.

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