New names needed

New names. Investment bankers need them as part of the process of forming new public companies, while investors, particularly the fixed-income kind, also need them as part of a diversification of their investments. That diversification is deemed important in Canada because of the dominance of financial institutions and utilities in the overall issuance of debt.

Monday, the debt markets welcomed a new name: Penske Truck Leasing Canada Inc., an entity that has been around since 1994 and whose fleet consists of more than 11,200 trucks, tractors and trailers. At day’s end, it had raised $375 million (or $75 million more than anticipated) of five year senior secured 3.65% debt.

The debt, sold at a slight discount to par and which provided a 3.675% yield to maturity, was rated BBB+ by Chicago-based Fitch Ratings. (S&P’s rating was two notches lower.) One reason for the ranking was that the notes are guaranteed by the parent company.

The local issuer is a unit of U.S.head quartered Penske Truck Leasing Co., LP, with the latter being a joint venture of Penske Corp. (41.1%); Penske Automotive Group (9%); and General Electric (49.9%.). Two of the three parties, Penske Automotive Group and GE are public. In the U.S. Penske Truck Leasing was set up in 1988 as “a dual issuer special purpose entity,” for the sole purpose of “issuing debt notes in order to reduce outstanding debt obligations under the current credit facility.”

The notes issued by the Canadian unit rank equally with the notes issued by the U.S. parent — which in the last couple of weeks raised US$1 billion via a two-tranche debt offering: US$500 million of five year debt and US$500 million of 10-year debt. Fitch said it does “not believe there will be a material impact on the PTL’s leverage as a result of the issuance, as proceeds will be used to repay borrowings in Canada and reduce the intercompany debt balance.”

In this way the use of proceeds is the same as that for the two recent US$-denominated financings: the cash raised was used to repay borrowings under PTL’s revolving credit facility with the banks and its credit facility with GE Capital.

But despite the similar use of proceeds and the same rating, the Canadian issuer was required to pay a higher interest rate: its 5.5 year US$-denominated deal came with a 2-7/8% coupon — about 75 basis points below a comparable C$-denominated offering. One other difference: JP Morgan, BofA Merrill Lynch and Wells Fargo Securities were the agents on the US$-deal whereas RBC Capital Markets and Scotia Capital ran the show for the Canadian-dollar offering.

So what’s the deal with new names, particularly those that come with an investment grade rating? It’s all about non-Canadian based issuers wanting to diversify their sources of funding and of investors broadening the scope of their opportunities without typically taking any currency risk.

Penske’s deal is the third new name this year. Last Friday Calgarybased Southern Pacific Resource Corp. closed a $260 million high yield, five year offering of senior secured second lien notes that pay 8.75%, while in mid-month, Spy Hill Power L.P., a unit of Northland Power, raised $156.3 million of 4.14% amortizing bonds.

Off the Record