Energy Issuers Ride Oil Price Geyser To HY Market
May 9, 2008
As I write this, oil prices hover at a mind-boggling $123 a barrel, and pain at the gas pump has created a united front of kvetching across an otherwise divided country. It's also created, quite contrarily, a happy little boom on the high yield bond market.
In the last month or so, a string of energy companies have priced new issues on the high yield market, and enthusiastic investors, who've recently become reacquainted with their confidence, have jumped on board, buying up various deals, mostly at par or above.
Of course, the primary market's new found vitality reaches beyond the energy sector. The market strengthened in general in April, topping the first quarter's measly 13 new issues with 14 deals across a number of sectors, including gaming, technology and autos. By May 8, eight new issues had priced so far this month, and four more were on the calendar. And just to provide a little context for this improvement-of the 21 high yield bond deals that came to market between April 1 and May 8, nine of them were energy companies.
"These companies are basically saying, 'We have free cash flow, and even though we're high yield rated, times are pretty good here,'" said Scott MacDonald, head of research at Aladdin Capital Management. "Even though the U.S. economy is stagnated or in a recessional mode, oil prices continue to go up. It's a window of opportunity, and they're taking advantage of it."
On May 5, Newfield Exploration priced $600 million in 7.125% senior subordinated notes at par, and, a day later, Atlas Energy issued $100 million in 10.75% senior notes at 104.75. Those deals came on the heels of issues from CenterPoint Energy, which priced $300 million in 6.5% senior notes at 99.49, and Range Resources Corp., which came to market with $250 million in 7.25% senior subordinated notes at par. Both of those issues came on May 1.
Peter Ehret, lead manager of Invesco Aim's AIM High Yield Fund, pointed out that beyond the boost oil prices offer, many energy issuers are simply strong companies, whose existing bonds are trading at par or above on the secondary market, which sets the bar for where their new issues will come.
"It isn't a surprise to see some of those bonds above par," he said. "The market has really just been recovering for a few weeks, so it's still really tough for lower-quality companies to come to market. It would only be natural that, after what the markets have been through, now that they're open again, higher-quality companies are coming first."
And while investors agree that the high yield market still has challenges ahead, sentiment has done a 180 from where it stood a few months ago. As one New York-based investor put it, "the world is definitely not ending." -CJC
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