Richard Kinder has created a windfall for bondholders brave enough to invest in his energy empire’s riskiest securities. More cautious lenders will have to be content with clipping their coupons.
Creditors of Kinder Morgan Inc. and El Paso Pipeline Partners LP (EPB:US) units have seen some of the biggest gains in the corporate bond market this month as the companies are expected to benefit in the new corporate structure. The market value of their notes rose $468 million, while securities of investment-grade Kinder Morgan Energy Partners LP (KMP:US) lost $85 million since the Aug. 10 announcement that the three units plus the debt-free Kinder Morgan Management LLC (KMR:US) would be rolled into one.
The changes come as ratings companies say they expect to award their lowest investment grades to the combined business, benefiting El Paso and the junk-rated parent Kinder Morgan Inc. while reducing the grade of Kinder Morgan Energy Partners.
“Credit protection is being transferred from Kinder Morgan Energy Partners to Kinder Morgan Inc. and El Paso,” Stuart Miller, a Moody’s Investors Service vice president, said in a telephone interview from New York. “That is being reflected in the bond prices.”
Six of the top 10 bond gainers among U.S. corporate notes this month come from Kinder Morgan Inc. and El Paso Pipeline Partners, according to Bank of America Merrill Lynch bond data.
Kinder Morgan’s $1 billion of 7.75 percent notes due 2032 have surged more than 14 percent this week, rising 15.5 cents to 125.5 cents on the dollar to yield 5.46 percent since the time of the announcement, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Those securities were sold by El Paso LLC, a directly held unit of Kinder Morgan Inc.
The cost to protect the debt of Kinder Morgan Inc. for five years fell 72 basis points to 116 basis points this week to the lowest level in five years, according to data provider CMA, which compiles prices quoted by dealers in the privately negotiated market.
Collapsing the corporate structure “makes Kinder Morgan Inc. less risky,” Miller said, in part because it will give the pipeline and terminals company direct access to cash flows of Kinder Morgan Energy Partners.
The transaction, which is valued at about $70 billion including $27 billion of assumed debt, will create “the largest energy infrastructure company in North America,” Kinder, the chairman and chief executive officer of Kinder Morgan Inc. (KMI:US), said in an Aug. 10 statement.
The consolidation is expected to streamline Kinder Morgan’s corporate structure and bring down borrowing costs, which will help the company make future acquisitions.
“While we like the structural simplification, lack of structural subordination, and large-cap stock to support debt-financed growth, there are several features that concern us,” Philip Adams, a bond analyst at Gimme Credit LLC, wrote in an Aug. 12 report, referring to the company’s increased leverage and plans for growth through acquisitions.
Kinder Morgan Inc.’s debt to earnings before interest, taxes, depreciation and amortization may increase to between 5 and 6 times, according to Moody’s.
“It’s going to be very highly levered, they’ll have a lot of debt compared to their peers,” Peter Molica, an analyst at Fitch Ratings in New York, said in a telephone interview. Fitch rates Kinder Morgan Inc. BB+ and said in an Aug. 11 statement that it expects to raise that to an investment-grade BBB- after the consolidation. Standard & Poor’s, which now grades the parent company BB, plans to rate the combined entity BBB-, according to an Aug. 11 statement.
While Kinder is expected to cling to an investment-grade rating for his company, it’s likely to be on the cusp. Moody’s is planning to raise Kinder Morgan Inc. and El Paso to Baa3 and decrease Kinder Morgan Energy Partners to that level.
Bonds rated below Baa3 by Moody’s and BBB- at S&P and Fitch are considered high-yield, high-risk, or junk.
The market value of the company’s bonds is about $35.8 billion, with Kinder Morgan Energy partners having the most at $22.6 billion, according to data compiled by Bloomberg.
“The Kinder Morgan roll-up of four tickers into one $120 billion enterprise has left us, and many clients, wondering how the surviving entity can have 5.0-5.5x leverage and investment grade ratings,” Andy DeVries, an analyst at research firm CreditSights Inc., wrote in an Aug. 12 report.
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