Why MLPs’ Debt Issuance Jumped in H1 2018

Debt issuance

MLPs’ debt issuance jumped sharply in the first half of this year. According to Goldman Sachs Asset Management, MLPs raised $22.5 billion from debt markets in the first five months of this year, equal to ~92% of the total debt issued in 2017. The sharp jump in debt issuance could be attributed to low equity issuance and a slight increase in capital spending for new projects. MLPs raised $2.4 billion from equity markets, equal to just 14.4% of equity issued in 2017.

Why MLPs’ Debt Issuance Jumped in H1 2018

MLPs could continue to finance their 2018 growth capex from internally generated cash flow and debt rather than through equity capital markets, to prevent dilution and the high cost of equity capital. MLPs could be in a tight spot if crude oil prices fall and leverage increases, which seems less likely.

Mergers and acquisitions

MLPs’ M&As (mergers and acquisitions) also picked up in the first half of this year. The MLP space saw M&As of $40.9 billion up until May, equaling ~47% of M&As in 2017. Following the Federal Energy Regulatory Commission’s ruling, Williams Companies (WMB) and Enbridge (ENB) acquired their limited partnerships in simplification transactions, which we’ll look at later in this series.

NuStar Energy (NS) and Tallgrass Energy Partners announced simplification due to the high cost of equity capital resulting from incentive distribution rights present in their capital structure. We could see more of these transactions in the second half of 2018. In the next article, we’ll look at major headwinds for MLPs in H1 2018.