High Grade: Kinder Morgan Bonds Rally On 75% Dividend Cut

Bonds backing energy giant Kinder Morgan Inc. (NYSE: KMI) snapped tighter today after the company yesterday slashed its annual dividend by more than 75%, to $0.50 per share. The retracement follows a widening after the company’s recent plan to boost its stake in distressed entity Natural Gas Pipeline Company of America LLC (NGPL).

KMI 4.3% notes due June 1, 2025—which date to issuance in November 2014 at T+205, as part of a $6 billion, five-part deal backing a big consolidation play across related pipeline entities, including Kinder Morgan Management LLC (KMR), and master limited partnerships Kinder Morgan Energy Partners L.P. (KMP) and El Paso Pipeline Partners L.P. (EPB)—traded today as tight as T+376, or 34 bps tighter on the day, 114 bps tighter week to week, and 50 bps tighter net of the last month, according to MarketAxess.

Five-year CDS referencing KMI debt declined by 75 bps to the 425 bps area in an ebb from post-crisis heights, in the context of year-to-date lows near 100 bps early this year, and readings below 300 bps as recently as Nov. 5, according to Markit.

The NGPL transaction—announced at the end of November, and under which KMI will pay roughly $136 million to boost its ownership in triple-C-rated NGPL to 50%, from 20%, while Brookfield Infrastructure Partners will pay $106 million to raise its stake to 50%, from 27%—drew an outlook revision on KMI’s Baa3 rating at Moody’s, to negative. However, the agency has reversed course on that revision in the wake of the dividend-policy shift, and yesterday revised the outlook again to stable.

As an expected result of now-reduced reliance on the debt and equity capital markets, KMI’s “negative free cash flow in 2016 of about $2.2 billion, which includes debt maturities totaling $1.7 billion, could be funded under the company’s revolving credit facility,” Moody’s stated yesterday in its outlook rationale.

S&P and Fitch have also affirmed their respective BBB- ratings and stable outlooks on KMI since the dividend shift.

“The move eliminates nearly all of the company’s funding risk headed into 2016 and positions KMI more favorably from a liquidity and balance sheet perspective,” S&P stated yesterday. “We believe KMI will use the approximately $3.8 billion of annual retained cash flow toward funding its ambitious, multi-year organic growth program in addition to reducing debt funding needs. In our view, KMI’s core operations remain intact and, while the company could be locked out of the equity markets for an extended period of time, operating cash flow should support the majority of funding needs over the next few years. Pro forma for the move, we now expect net debt to EBITDA to be around 5.5x through 2018 and dividend coverage to be comfortably above 2x.”

Moody’s previous negative outlook reflected the risk of NGLP’s potential default on pending interest payments, raising the potential need for KMI to provide debt-funded cash injections. — John Atkins


High Yield Bonds Creep Higher in Secondary After Brutal 2-Day Stretch

High-yield appears to have found a near-term floor after two rough days, and a modest rebound rally was underway this morning in steady volume.

Even with some decent moves higher this morning—whether on short-covering or opportunistic buying, or a combination of both—some of the damage is remarkable, and indexes remain roughly 1.5% lower week over week as of last night’s close. (See: LCD Daily HY Bond Index Report: Data for December 8, 2015 $)

As for some movers, Dynegy 7.625% notes due 2022 traded three points higher this morning, at 89.5, but remain lower by four points week over week, trade data show. Likewise, Energy Transfer 5.5% bonds due 2027 changed hands in blocks today at 78.25, versus 76.375 yesterday, but 84.5 last week. – Matthew Fuller

Follow Matthew on Twitter for high yield bond news and insight. 


Bankruptcy: FCC OKs LightSquared change of control; clears way for Ch. 11 exit

The U.S. Federal Communications Commission on Dec. 4 approved a change-of-control application forLightSquared, the company announced, saying the approval “[paved] the path toward emergence from Chapter 11.”

In a statement, the company said it would notify the bankruptcy court in Manhattan overseeing its Chapter 11 proceeding, “signaling the effective date of its confirmed plan of reorganization and enabling the mobile operator to successfully exit restructuring.”

As reported, LightSquared filed for Chapter 11 on May 14, 2012. Following a heavily litigated and contentious Chapter 11 as key stakeholders battled over control of the reorganized company, the bankruptcy court finally confirmed a reorganization plan on March 26, 2015. Emergence from Chapter 11, however, had to await regulatory approval by the FCC. (For a detailed description of the terms of the company’s reorganization plan, see “LightSquared’s new plan embraces Harbinger as Ergen looks for exit,” LCD News, Dec. 18, 2014; “LightSquared puts ‘as-is’ enterprise value at $4.5-6.8B,” LCD News, Jan. 7, 2015; “LightSquared ready to pay Ergen in full in cash, says case now over,” LCD News, March 18, 2015.)

Still to be resolved, however, is LightSquared’s battle with the GPS industry, which contends that LightSquared’s wireless spectrum is too close to, and could potentially interfere with, the portion of the spectrum used for GPS. —Alan Zimmerman


BDCs advance cause to boost leverage with house committee vote

BDCs notched up another victory in a quest to boost leverage and reduce paperwork requirements.

In a 53-to-4 vote last month, the House Financial Services Committee passed HR 3868, the Small Business Credit Availability Act.

What’s notable in the committee vote is the strong showing of bipartisan support. A previous version of the bill was passed by the House Financial Services Committee 31-26, along a straight party line vote.

“The industry has come together to make their case. Even though they’ll compete passionately against each other in the market, they have to work collaboratively to create a regulatory environment in which they can compete and thrive,” said Brett Palmer, President of the Small Business Investor Alliance (SBIA), in an interview with LCD.

“The mark of a mature industry is recognizing a common interest.”

The next step for the current bill, HR 3868, is the passage by the full House of Representatives, which may come in the next few months. The strong support for the bill by the committee could reflect the bill’s chances of succeeding.

A short legislative calendar next year, in part due to the presidential election, could diminish the bill’s chances of full passage by January 2017. The previous bill expired with the expiration of that Congress. An even earlier version of the bill suffered from an introduction near the end of a congressional cycle, and also eventually expired.

However, working in the bill’s favor this time is the fact that it was marked up in the first session of this Congress, giving the bill all next year to work through full House and Senate votes.

“This may be slow, but it is a very good trend,” said Palmer. “The clock matters.”

Leverage increase: image problem?

The bill was the result of compromise to bring former opponents to the bill from the committee on board. But even with changes, it was not without critics, including from the SEC and state regulators. Proponents of the bill say they have met criticism with increased investor protection.

“Every time the SEC came back to us with changes, we made them,” said Rep. Mick Mulvaney (R-SC), the sponsor of the legislation, in the Nov. 4 markup.

Possibly the most important potential change in the works for BDCs is the asset-coverage requirement. The bill would effectively raise the leverage limit to a 2:1 debt-to-equity ratio, from the current 1:1 limit.

Moreover, existing rules dictate that BDCs invest at least 70% of total assets into “eligible portfolio companies,” leaving out many financial companies. The new bill aims to allow investments in 20% of certain finance companies. The bill would also allow a BDC to issue multiple classes of preferred stock, and streamline their registration process.

“It includes provisions I would have preferred were never offered. For example, I see no reason to allow BDCs to invest more assets in finance companies. However, by agreeing to cap the additional assets by 20% I think we will still preserve the character of BDCs as a useful mechanism for delivering funding to small businesses,” Maxine Waters, (D.-Calif.), Ranking Member of the House Financial Services Committee, said in the markup last month.

“I have bent over backwards for this bill, because I do want our small businesses have access to capital,” Waters said.

Jim Himes (D-Conn.), who voted against the bill, raised his reservations during the Nov. 4 markup. He said he had concerns with the bill mainly due to consumer protection issues.

“The underlying idea of expanding credit availability to small businesses through the BDCs is a good idea,” Himes said in an address to the committee at the markup. “They are fairly complicated instruments, but at the end of the day they end up in the hands of retail investors.”

The increase in leverage to 2-to-1 from 1-to-1 is actually a much larger increase in leverage than it appears, particularly in the 30% basket which could include leveraged businesses that are part of CLOs, Himes said.

“Of course it is banks that are lending to these BDCs, and they do their work. They’re not going to lend, hopefully, to BDCs that are behaving irresponsibly. But remember, that BDCs will chase yield… which means they have an incentive to lever up through that 30% bucket.”

Himes also expressed concern about the expansion of investment to financial services companies.

“This bill, which again, I think I can find my way to supporting, will simply make these instruments slightly more risky.

“More of these instruments will fail, and the retail investors will pay the cost for those additional failures. That may be ok so long as we’re comfortable with the idea that credit should be more available to the business. That’s the trade off,” Himes said.

Bill has bi-partisan support

Rep. Mick Mulvaney (R-SC), the sponsor of the bill, cites a 2013 tour of Ajax Rolled Ring and Machine as the moment he learned what a BDC was. At the time of Mulvaney’s tour, Ajax was controlled by Prospect Capital. Propsect’s investment in Ajax from April 2008 included a $22 million loan and $11.5 million of subordinated term debt.

The SBIA has long argued that BDCs are an important lender to small and mid-sized companies, a segment underserved since increased regulation on banks in the wake of the credit crisis. The middle market, which the SBIA defines as companies that generate $10 million to $1 billion of revenue, is growing faster than other parts of the economy.

Mulvaney stands by BDCs as an important source of credit for companies that are too big for their local bank but too small for a regional bank, capital markets, or national financial institutions. He believes modernization of BDC regulation is overdue.

“This is in a world now where other financial institutions that are competing for similar types of businesses are leveraged as much as eight or nine to one. It would seem fit today to expand that leverage slightly, slightly, to 2 to one, not eight to one or nine to one,” said Mulvaney at the markup.

“Another limitation we put on these entities when we created them for some reason was not to allow them to invest in financial institutions small and medium sized financial institutions, investment advisor firms… These are segments of our economy that badly need access to capital. The BDCs stand willing and able in a very sound way to provide those businesses with capital.

“This is a tool that we are not using adequately. This is a tool that we should be using,” Mulvaney said. — Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, BDCs, distressed debt, private equity, and more.

See also “BDCs head to Washington to make case to modernize rules,” LCD News, June 20, 2015.


US High Yield Funds See 1st Cash Inflow in Four Weeks, Thanks to ETFs

Retail-cash flows to U.S. high-yield funds were positive for the first time in four weeks, with a $398 million inflow in the week ended Dec. 2, according to Lipper. However, that figure doesn’t fully compensate for last week’s $501 million outflow, not to mention the two big outflows prior.

hy fund flows

Moreover, the inflow was all ETF-related. Indeed, mutual funds reported a net outflow of $113 million this past week, while ETFs were plowed with $511 million, for the net-positive observation. Whatever that might say about fast money, hedging, and market-timing, it’s the first ETF-positive inverse reading in nine weeks.

Although it’s a net inflow, the trailing-four-week average deepens to negative $815 million per week, from negative $402 million last week and positive $232 million the week prior. The current observation is the deepest negative reading in 14 weeks.

The full-year reading slips to positive $1.4 billion, also with an inverse measurement to ETFs. The full-year reading is negative $1.4 billion for mutual funds against positive $2.8 billion for ETFs, for an inverse 204% reading.

Last year, after 47 weeks, it was the opposite. There was a net outflow of $1.5 million based on $78 million of mutual fund inflows against $80 million of ETF outflows. (Recall that last year’s tally at this point in the year included the all-time record $7.1 billion outflow in the week ended Aug. 6, 2014.)

The change due to market conditions last week was the strongest in eight weeks, at positive $1.2 billion, or nearly 0.7% against total assets, which were $190.9 billion at the end of the observation period. At present, ETFs account for $37.8 billion of total assets, or roughly 20% of the sum.

Recall that a change due to market conditions of negative $3.2 billion nine weeks ago, or nearly a 2% drop, at the depths of the September market sell-off, was the largest one-week plunge in 120 weeks, or roughly 2.3 years, dating to the $3.7 billion deterioration in the week ended June 26, 2013. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.


Bankruptcy: Energy Future Holdings Reorganization Plan Nets Court OK

The bankruptcy court overseeing the Chapter 11 proceedings of Energy Future Holdings (EFH) today confirmed the company’s reorganization plan.

In a lengthy opinion read this morning from the bench in bankruptcy court in Wilmington, Del., Bankruptcy Court Judge Christopher Sontchi said the evidence presented in the case “overwhelmingly supports confirmation of the plan.”

Among other things, Sontchi lauded the company’s management and professionals at the close of his opinion, directing them, to laughter from the courtroom, to “go forth and implement the plan,” or as Sontchi termed it, “the easy part.”

Following certain settlements reached in the case last week, the confirmation ruling was expected (see “With latest Energy Future settlement, plan nod could come next week,” LCD News, Nov. 25, 2015 -$$).

In confirming the reorganization plan, Sontchi acknowledged that the proposed plan was subject to some amount of implementation and regulatory risk, but found the risk was relatively small given the company’s size and complexity, and mitigated by the built-in financial and legal incentives for the parties to consummate the proposed plan, and the strong reputation and experience of the plan’s primary backer, the Texas-based Hunt family via Hunt Consolidated.

It should be noted that Sontchi did not approve certain provisions of the plan related only to the mechanisms under which professionals that worked on the case would get paid, but this part of the ruling will not have any effect on the plan itself insofar as the company or its creditors are concerned.

Sontchi also issued a separate ruling this morning approving certain settlements in the case upon which the company’s reorganization plan is based. Those settlements include, among other things, a $700 million settlement of a tax allocation claim asserted against EFH by unit Texas Competitive Electric Holdings (TCEH, or the company’s so-called “T-side”), as well as certain other deals reached by the company, one with Fidelity Management & Research, one with certain other key holders of unsecured debt at EFH and unit Energy Future Intermediate Holdings (EFIH), and one with the official creditors’ committee representing creditors at EFH and EFIH, primarily with respect to the amount and manner of calculation of allowed interest related to unsecured claims on the company’s so-called “E-side.”

As reported, the company filed for Chapter 11 on April 29, 2014, following nearly a year of contentious and often public disputes as it sought to restructure its large and extremely complex capital structure.

In the end, the company’s largely consensual reorganization was made possible by the value ultimately ascribed to its regulated utility, Oncor, and the decision to unlock that value via a REIT conversion.

As reported, under the plan Hunt would back an investment of roughly $12.6 billion, comprising up to $5.5 billion in a senior secured term loan, a $250 million bridge loan, and about $7 billion of equity, including the $5.8 billion to be raised through a rights offering to unsecured creditors of TCEH.

As also reported, the plan calls for TCEH to be spun off as a standalone entity. The new entity would, among other things, use certain tax attributes of EFH, valued at about $1 billion, to provide it with a partial step-up in the tax basis of its assets. (Note that the proposed reorganization plan is conditioned on, among other things, a private tax ruling from the IRS approving this structure. The company applied for a ruling on June 10, 2014, but according to the disclosure statement has yet to receive a reply.)

As noted above, the plan also provides for a $700 million payment from EFH to TCEH in settlement of a tax claim asserted against the parent company arising out of disputes over certain tax-sharing arrangements among the company and its subsidiaries.

First-lien lenders to TCEH (with claims of roughly $26 billion) would receive, among other things, all of the equity of the spun-off the new entity (subject to dilution by the management-incentive plan), cash on hand, the cash proceeds from the issuance of new TCEH debt and preferred stock, and the rights to purchase $700 million in new EFH stock pursuant to a rights offering in connection with the plan.

The recovery rate for the first-lien lenders is estimated at 59.4%, according to the company’s disclosure statement.

Unsecured creditors at TCEH, meanwhile, comprising holders of first-lien deficiency claims (in an allowed amount of $8.1–9.5 billion, which holders would waive with respect to distributions, but not with respect to voting rights), second-lien notes claims (in an allowed amount of about $1.6 billion), unsecured notes claims (in an allowed amount of $5.1 billion), and general unsecured claims, would receive a pro rata share of 2% of the stock in the reorganized EFH, and the rights to purchase about $5.1 billion of the reorganized EFH common stock.

The recovery rate for unsecured claims would range from 6.8–44.9%, according to the company’s disclosure statement, depending upon, primarily, the spun-off entity’s enterprise value, which the disclosure statement measures in a range of $19–24 billion in calculating recovery rates.

Holders of claims against EFH and EFIH, meanwhile, would be paid in full, in cash, except that EFH legacy note claims (with about $1.9 billion outstanding, including about $1.3 billion of which are held by EFIH) could, at the company’s option, be reinstated.

According to the company’s disclosure statement, creditors of EFH and EFIH were unimpaired, and therefore were presumed to accept—and thus did not vote on—the proposed reorganization plan.

Following the TCEH spin-off, EFH would be restructured into a REIT, which would continue to own the transmission and distribution assets currently owned by Oncor. The newly restructured REIT would be managed by Hunt and owned by the consortium of investors, which include Anchorage Capital Group, Arrowgrass Capital Partners, Blackrock, GSO Capital Partners, Avenue Capital Group, and the Teacher Retirement System of Texas. — Alan Zimmerman


Ball Corp bonds edge higher on break in improved high yield market

Ball Corp. 4.375% non-call notes due 2020 edged up to 100.5/101 on the break this afternoon, from par issuance, according to sources. Ongoing demand is noted even after pricing was at the tight end of talk after a roughly $200 million upsizing, to $1 billion, via a Goldman Sachs–led bookrunner group.

Gains are also noted against the backdrop of a better secondary high-yield market today. Other new issues also advanced, such as Team Health 7.25% notes due 2023, which were trading in a range of 102.5–102.75, versus 102.25–102.5 yesterday, and the 5.875% bonds due 2026 from data-centers operator Equinix, which changed hands in large blocks today at 104.5, as compared to 104 yesterday, trade data show.

The broader market improved as well, with some widely held issues on higher ground, such as Dollar Tree5.75% notes due 2023, which added half a point, to 104.25/105.25, according to sources. Beaten down Intelsat paper outperformed, with the benchmark 7.75% notes due 2021 trading up three full points today, at 46, trade data show. In contrast, the unfunded HY CDX 25 index dipped an eighth of a point, to a 102.625 context, according to Markit.

The BB+/Ba1/BB+ return to market by can-maker Ball Corp. was a cross-border effort, with additional tranching including a €400 million series of 3.5% notes due 2020 and a €700 million longer-date issue of 4.375% notes due 2023. The deal was net-upsized from €1.5 billion to roughly €2.04 billion, and all three tranches were finalized at the tight end of guidance. Proceeds will be used to fund the cash portion of Ball Corp’s £5.4 billion acquisition of London-based rival metal-packaging concern Rexam. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.


Distressed Debt: Swift Energy Bonds Wallow In Low Teens After Co. Skips Dec. 1 Coupon

Bonds backing Swift Energy were wallowing at record lows in the low teens yesterday afternoon after the company admitted it would not make the Dec. 1 coupon payment due to holders of a $250 million issue of 7.125% notes due 2017. The company’s two other series were in the same context, such as the 7.875% notes due 2022, which traded in a round lot at 13, trade data show.

As the company enters typical 30-day grace, it also said it has retained Lazard with respect to “realigning its balance sheet” in addition to addressing financing alternatives and enhancing its liquidity profile, according to the company statement. In addition to the three series of corporate bonds outstanding totaling $875 million, the company is showing $330 million of credit line borrowings as of Nov. 30, 2015.

As previously disclosed, Swift management said it is engaged in “ongoing negotiations with a group of holders” of the outstanding senior notes. Top holders include funds managed by Wells Fargo, Guggenheim, Kornitzer, and Sky Harbor, holders data on Bloomberg showed.

Recall that Swift Energy bonds were in the 50s five months ago when the oil-and-gas E&P concern launched a $640 million term loan via lead arranger J.P. Morgan, precipitating downgrades on the credit, the bonds, and the outlook. See “Swift Energy bonds drop after co. launched new term loan, downgraded,” LCD News, June 24, 2015. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.


High grade bonds: Whole Foods doubles bond offering to fund stock buybacks

After doubling the deal size, Whole Foods Market today completed a $1 billion offering of 5.2% notes due December 2025 at T+300, or 5.218%. The issue, which was originally marketed at $500 million, was printed through early whispers in the low-T+300s.

Proceeds will be used for working capital and general corporate purposes, including stock repurchases and the repayment of indebtedness from time to time. On Nov. 4, after releasing quarterly earnings that missed expectations, Whole Foods also announced a new $1 billion share repurchase program. The new authorization does not have an expiration date.

Austin, Tex.–based Whole Foods operates natural and organic foods super markets.

Earlier today, Standard & Poor’s assigned a BBB– rating to the new 10-year notes. “Our ratings and the negative outlook on the corporate credit rating reflect our view that Whole Foods remains the leader in the natural and organic sub segment of the highly fragmented food retail industry, yet its overall share of the food retail industry is still relatively small and under pressure,” the agency said today.

Following the buyback announcement earlier this month, S&P revised the outlook on its BBB– rating to negative, from stable, reflecting the “expectations that Whole Foods’ credit protection measures could weaken below our previous forecast over the next two years because of less conservative financial policies combined with weaker operating performance. We anticipate that the company will encounter difficulties in achieving its operational goals in light of its shift in strategic priorities. This includes focusing more on price investments and expense management in response to declining sales trends,” the agency said on Nov. 5.

On Nov. 10, Moody’s assigned a Baa3 senior unsecured rating to Whole Foods. “Despite recent weakness in operating performance and the potential of a $1 billion increase in funded debt to primarily finance share repurchases, the company’s proforma credit metrics will remain strong with lease adjusted leverage of about 3.1 times. We expect management initiatives including price investments, cost cuts, expense control and moderation in new store growth to result in improved profitability in the next 18-24 months,” analysts said. Terms:

Issuer Whole Foods Market
Ratings BBB-/Baa3
Amount $1 billion
Issue 144A/Reg S (with registration rights)
Coupon 5.200%
Price 99.861
Yield 5.218%
Spread T+300
Maturity Dec. 3, 2025
Call Make-whole T+45 until notes are callable at par from three months prior to maturity
Trade Nov. 30, 2015
Settle Dec. 3, 2015
Books JPM/MS
Px Talk IPT low-T+300s
Notes Upsized from $500 million
Proceeds will be used to fund a share repurchase program

Outflows from US HY funds continue, but at slower rate

Retail-cash flows to U.S. high-yield funds were negative $501 million in the week ended Nov. 25, according to Lipper. While this is the third consecutive outflow, it is milder than the $1.4 billion and $1.8 billion totals in the two prior weeks.

The combined redemption over that period of $3.2 billion followed $9.6 billion of inflows over the five weeks prior.

In a notable shift, ETF flows were slightly positive at $3.7 million. In the prior week, ETF outflows contributed 26% to the total while during the week ended Nov. 11 it drove 70% of a heavy week of flows out of the asset class.

The trailing-four-week average turned negative this week at $402 million, from positive $232 million in the previous week.

The full-year reading falls to positive $984 million, with an inverse measurement to ETFs. The full-year reading is negative $1.33 billion for mutual funds against positive $2.31 billion for ETFs, for an inverse 235% reading.

Last year, after 47 weeks, there was a net inflow of $858 million based on $659 million of mutual fund inflows and $199 million of ETF inflows. (Recall that last year’s total tally at this point in the year included the all-time record $7.1 billion outflow in the week ended Aug. 6, 2014.)

The change due to market conditions last week remained negative, at $1.25 billion, or 0.7% against total assets, which were $189.1 billion at the end of the observation period. (Note: any reconciliation to prior reports will show a disjointed asset pool due to some fund reclassifications. Please contact Lipper for details.) At present, ETFs account for $37.1 billion of total assets, or roughly 20% of the sum.

Recall that a change due to market conditions of negative $3.2 billion seven weeks ago, or nearly a 2% drop, at the depths of the September market sell-off, was the largest one-week plunge in 120 weeks, or roughly 2.3 years, dating to the $3.7 billion deterioration in the week ended June 26, 2013. — Jon Hemingway/Matt Fuller