Bond Upgrades Help Commodities Firms -- WSJ
August 04 2017 - 03:03AM
Dow Jones News
Pressures can ease, and debt prices rise, letting companies
borrow more cheaply
By Tatyana Shumsky
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (August 4, 2017).
Commodity-related firms and their investors are reaping the
rewards of a record stretch for corporate-bond upgrades.
Natural-gas exporter Cheniere Energy Partners LP and oil refiner
Andeavor Corp. are among the companies whose ratings have climbed,
pushing a combined $91.7 billion onto Bank of America Merrill
Lynch's investment-grade corporate-bond index from its high-yield
index over the 12 months ended June 30. Energy and basic-materials
businesses accounted for 85% of the bonds moving between the
indexes.
The upgrades have boosted bond prices, opened some companies to
lower-cost borrowing and helped bolster balance sheets. It is a
reversal of recent years in which slumping commodities shut many of
the largest producers out of the high-quality bond market.
Finance chiefs across the industry responded to that slump by
slashing costs, selling assets and buckling down on operational
improvements to revive profit margins and reduce debt.
At the same time, a rebound in resource prices and a stronger
global economy improved company balance sheets and helped propel
the broader wave of upgrades.
Cheniere Energy's first upgrade, from S&P Global Ratings
last September, attracted attention from Todd Schomberg, senior
portfolio manager at Invesco Ltd., which manages around $858
billion. Mr. Schomberg invests in companies likely to transition to
investment grade because of prudent financial management or
improving economic conditions, known as "rising stars" in the bond
world.
He purchased outstanding bonds from Cheniere earlier this year,
betting that the company's debt would rally to reflect its improved
credit rating. Cheniere bonds due in 2022 traded recently for
113.53 cents on the dollar, up from 109.50 at the start of 2017,
just before a second upgrade in January, according to FactSet.
An upgrade "shows discipline and it shows a commitment to a
conservative balance sheet," Mr. Schomberg said.
Receiving an investment-grade rating was "like flipping a light
switch" for natural-gas exporter Cheniere Energy Partners, said
Michael Wortley, finance chief of parent company Cheniere Energy
Inc. Most natural-gas suppliers immediately stopped requiring
upfront payments, freeing up hundreds of millions in capital for
the largest buyer of natural gas in the U.S., Mr. Wortley said.
Along with the potential for lower rates on bonds or credit
lines, investment-grade status allows companies like Cheniere to
issue bonds due in decades rather than years.
They also have an easier time accessing funding because
investment-grade bond markets are relatively liquid, and their low
credit risk means they aren't required to post a deposit or pay
upfront for certain business transactions.
"It just takes a lot of pressure off our business," Mr. Wortley
said.
Cheniere tapped the investment-grade debt market for the first
time in February. The company issued its longest and lowest-cost
bonds -- $800 million of senior secured notes paying a 5.0% coupon
due in 2037 and $1.35 billion in senior secured notes paying a 4.2%
coupon and due in 2028.
A company's average score among the three major credit-rating
firms must reach investment grade for its debt to shift to Bank of
America's high-grade index. That means that the bonds are typically
being upgraded by at least two ratings firms.
For oil refiner Andeavor, previously known as Tesoro, the
upgrades meant its $3 billion revolving credit facility is now
entirely unsecured, meaning it isn't guaranteed by assets or other
collateral, finance chief Steven Sterin said in an email.
Andeavor has roughly $7.6 billion in debt that it plans to
refinance over time, saving the company $75 million to $115 million
in annual interest costs, he said. In addition to lower borrowing
costs and less restrictive lending terms, Andeavor can now issue
bonds maturing in 30 years, a big change from eight to 10 years
previously.
"This meaningfully reduces refinance risk for the company," Mr.
Sterin said.
Write to Tatyana Shumsky at tatyana.shumsky@wsj.com
(END) Dow Jones Newswires
August 04, 2017 02:48 ET (06:48 GMT)
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