Share sales boost bonds
Capital from share sales helps credit ratings
Bond investors are benefiting from a renewed appetite for the stock market debuts of Canadian energy companies, with a flood of capital from share sales helping to bolster credit ratings and the prices of the securities.
Trading in Seven Generations Energy Ltd.’ s bonds suggest investors are betting on a rating upgrade, according to calculations by Moody’s Investors Service, after the company filed a preliminary prospectus for an initial public offering this week that’s expected to raise $800 million to $1 billion, according to people familiar with the matter.
Another energy producer was upgraded after its share sale last month and a third plans to go public this year.
“If you’re a private company and all you have is your original investors and the banks or high-yield debt, you’re a little bit constrained,” said Matthew Kolodzie, a credit analyst at Royal Bank of Canada in Toronto. “If the equity markets are open, and you’re able to raise equity, that’s only good for bondholders.”
Energy IPOs are surging this year as increased oil by rail shipments have eased pipeline bottlenecks and narrowed the discount Canadian producers face for their crude compared to international benchmarks.
Canadian energy companies raised $2.2 billion this year in IPOs compared with $725 million in all of 2013, according to data compiled by Bloomberg.
Seven Generations’ $700 million of bonds are trading at levels consistent with a B2 rating, one level higher than Moody’s official B3 company rating, the firm said Thursday.
“Any bondholder should take a little bit of extra comfort from the added transparency and capital raising flexibility that comes with a going public transaction,” said Geof Marshall at CI Investments Inc.
“Seven Generations has been a very good investment for us.”
Marshall said Seven Generations could use the proceeds of the share sale to buy back bonds, or to invest in its operations and grow the business.
Either one would improve a key metric used to determine the firm’s credit ratings, the ratio of debt to earnings, either by lowering debt or growing earnings.
Calgary-based Northern Blizzard Resources Inc.’s credit rating was upgraded by Moody’s after it used the proceeds of its share sale last month to pay down debt, and Teine Energy Ltd., with $350 million of bonds outstanding, is expected to go public later this year.
The slowdown in energy IPOs last year coincided with the discount Canada faces for its grade of heavy oil compared to North American benchmark grades widening out to a record $42 per barrel amid a lack of pipelines to international markets.
Though there are still delays getting new pipelines built — TransCanada Corp.’s Keystone XL has yet to receive U.S. government approval to ship Alberta crude to the Gulf of Mexico — the congestion has been eased by the use of rail.
“A few years ago, a lot of foreign investors completely exited Canada, including U.S. and European investors, because they saw this huge issue with Canadian producers not having access to market,” said Kyle Preston, a Calgary-based analyst with National Bank of Canada. “We’ve had this big build-out of rail, which has provided that additional access to market. Canadian oil price differentials have tightened up.”
The narrowing of that spread hasn’t been all good news, coming in part from falling prices for oil internationally as demand globally grows at its slowest since 2011, while the U.S. shale boom means production outside the OPEC countries is rising by the most since the 1980s, the Paris-based International Energy Agency said this month.
With New York crude-oil futures dropping to a 16-month low of $90.43 per barrel this month, Canadian energy stocks have lost 8.8 per cent through September, on track for their worst monthly performance since May 2012, according to Bloomberg data.
It’s too early to tell whether Seven Generation’s IPO will lead to an upgrade of its debt because there was no indication of what the proceeds would be used for, said Paresh Chari, an analyst at Moody’s in Toronto.