December 9, 2016 / 6:24 PM / 10 months ago

REFILE-Junk energy borrowers storm market

(Refiles to fix headline)

By Davide Scigliuzzo

NEW YORK, Dec 9 (IFR) - US junk-rated energy companies came steaming into the bond market this week, selling more debt than in any other week in more than two years thanks to a rally in oil prices.

Six companies including liquefied natural gas terminal operator Cheniere Energy, independent E&P name Parsley Energy and natural gas giant Chesapeake Energy tapped the market for a combined US$4.425bn.

All six were able to increase the size of their deals from the amount initially targeted, as the rally in crude helped shift investor sentiment about the long-troubled sector.

And the issuers were able to achieve attractive pricing levels, as spreads on junk-rated energy bonds have narrowed sharply after OPEC announced a production cut on November 30.

Since then, according to Bank of America Merrill Lynch data, junk energy spreads have snapped in 82bp to 472bp - the lowest level since October 2014, when oil was around US$88 per barrel.

“ are definitely capitalizing on the market right now,” Matt Kennedy, a senior portfolio manager at Angel Oak Capital Advisors, told IFR.

While oil is nowhere near those lofty 2014 levels - US crude was at $51.39 on Friday - it is well up from the roughly US$45 area seen before OPEC announced the output cut agreement.

“As prices move up and US shale production rebounds, it remains to be seen how sustainable prices are and how OPEC will respond,” said Kennedy.

Most of the six companies were refinancing debt, though one, Texas-based Matador Resources, was raising funds to buy new acreage.

According to an IFR analysis of data from Wells Fargo, it was the biggest issuance week for junk-rated energy credits since September 2014.

Chesapeake returned to market for the first time in two and a half years on Tuesday, raising US$1bn through an eight-year non-call three senior note that priced at a yield of 8.25%.

That was tighter than mid-8% whispers, though the deal priced with an original issue discount of 1.5 points.

Rated Triple C by Moody’s and S&P, Chesapeake will use proceeds to finance a tender on up to US$1.2bn of existing debt maturing from 2017 to 2023.

The deal is the latest in a series of liability management transactions and asset sales undertaken by debt-laden Chesapeake over the past year to increase its financial flexibility.

Meanwhile Parsley and offshore drilling contractor Rowan Companies also tapped the market Tuesday with a US$650m eight-year non-call three and a US$500m 8.5-year bullet, respectively.

The largest transaction came from Cheniere, which on Monday raised US$1.5bn through a 8.25-year bond for its Corpus Christi subsidiary to repay existing term loans.

The senior secured deal was upsized from US$1bn and priced at a final yield of 5.875%, tight to price talk of 6% area.

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As the window for issuance shrinks ahead of a Federal Reserve meeting next week, bankers say the surge in debt issuance from the sector is likely to carry into next year.

“There is certainly a lot more to come,” said one leveraged finance syndicate banker, who believes bond sales to back acquisitions and additional capital expenditure are also poised to pick up in the weeks ahead.

“Companies are building more confidence for oil prices into next year,” the banker said. “They are increasing drilling budgets and need capital.”

Among high-yield assets, several strategists have also highlighted the energy sector as one of their top picks for 2017.

Bank of America Merrill Lynch, for example, has an overweight recommendation on the sector for next year - alongside gaming and telecommunications - based on expectations that oil prices will continue to rise.

Wells Fargo also called this week for an overweight position on E&P companies for 2017.

“We are biased toward adding risk, given the improved commodity price outlook, stronger balance sheets and stable liquidity,” the bank’s analysts wrote in a report.

However, analysts at BAML also sounded a note of caution.

“Spreads [of commodity-related high-yield issuers] are now tighter than non-commodity high-yield. The last time this occurred was June 2014, when oil was roughly US$100/bbl,” its analysts said.

“While this stat does give us some cause for concern, it nonetheless does not change our overweight stance on energy paper.” (Reporting by Davide Scigliuzzo; Editing by Marc Carnegie, Natalie Harrison and Shankar Ramakrishnan)

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