Why smaller oil and gas firms are foraying into high yield debt


Dec. 4 2020, Updated 10:52 a.m. ET

New supply in the primary market for high yield debt

High yield debt (HYG) markets saw $6 billion worth of new supply issued across 12 transactions in the week ending October 24. This was twelve times the unusually low supply of $0.5 billion in the previous week. There was only one new issue in the week ending October 17.

Higher market volatility affected issuance the previous week. This resulted in higher yields for junk-rated (JNK) debt and lower investor demand making market conditions unfavorable for new issues. However, primary market conditions for lower-rated borrowers benefited last week due to improving US economic fundamentals. Please refer to part 5 of this series for a detailed analysis.

Impact of the Fed’s taper on the junk bond primary market

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The Fed may announce a taper of monthly bond purchases in its October FOMC statement, due on Wednesday, October 29. This move by the Fed is likely to have a greater impact on the Treasuries and investment-grade debt markets. Junk bonds may feel the effects of the taper in the form of lower market liquidity. This may impact investor demand for new debt, result in higher pricing, and impact new supply.

Purpose of issuance

Refinancing-related transactions dominated issuance last week, accounting for nine out of the twelve deals. Most issuers looked to take advantage of the slumping yields brought about by market conditions. This enabled them to pay off older and costlier debt by undertaking new debt at more favorable terms.

The three remaining deals in the week pertained to acquisition-related financing. These included the 2-part $1.3 billion issue by Tesoro Logistics LP (TLLP). The TLLP offering was also the largest deal of the week. The following article in this series will discuss the issue in more detail.

Issuance by sector

The healthcare, automotive, and consumer sectors had two deals each this week. The oil and gas (UNG) sector had the most deals, accounting for three of the twelve transactions to hit the market last week. Besides the TLLP deal and natural gas services provider, Targa Resources (TRGP) (NGLS) also issued $800 million in senior notes to refinance older debt.

While the TRGP issue was primarily refinancing-related, the proceeds from TLLP’s issue would be used partially for refinancing older debt and partially for financing TLLP’s acquisition of QEP Field Services LLC from QEP Resources Inc. (QEP). TRGP and QEP are part of the iShares Russell 1000 Growth ETF (IWF) and the Vanguard Total Stock Market ETF (VTI).

In the next section, we’ll go into more detail on these and other high-profile issues to hit the primary market.


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