Unusual MLP Debt/Equity Issuance

Master Limited Partnerships (MLPs) performed poorly last week, with the Alerian Index dropping 4.3%, bringing it to -7.7% YTD.  The yield on the index is now around 6.4%, 4.3% above the ten year treasury which is historically an attractive level. There were a couple of unusual financing transactions undertaken by MLPs over the past week. One was the issuance by Kinder Morgan (KMI) of Euro-denominated debt. They issued €1.25BN divided between seven and twelve year maturities. KMI has no natural need for Euros since their business is all in North America, and because they don’t operate there one might think that European investors wouldn’t be that familiar with them as an issuer. Nonetheless, KMI was able to issue seven year debt at 1.50% and 12 years at 2.25%. These yields are lower than what they’d pay in the U.S., and while it’s tempting to suggest that the declining € was an additionally attractive feature (since if the € is weaker against the $ when the debt matures that will create a further gain for KMI), such transactions typically involve a currency hedge, since KMI’s business is about running pipelines not speculating on FX rates.

But even with the hedge, it likely represents attractive financing for KMI and reflects a positive view of their investment grade debt outside the U.S.

Another unusual piece of financing came from Targa Resources Corp, (TRGP). TRGP controls Targa Resources Partners LP (NGLS), and while equity is normally issued at the MLP level, in this case the C-corp which owns the General Partner (GP) and Incentive Distribution Rights (IDRs) for NGLS carried out a secondary. They raised $292 million which could increase to $336 million if the underwriters exercise their 30 day option to buy additional shares. In effect it increased the stock component of TRGP’s earlier purchase of Atlas Pipeline Partners and Atlas Energy which closed at the end of February. Pure-play GPs need never issue equity because they don’t have any assets to finance. However, TRGP is a C-corp that owns and controls physical assets in addition to NGLS’s IDRs. As a result of the additional equity, TRGP’s Debt/EBITDA will come down to a pretty conservative 2.9X since they’ll use the proceeds to pay down part of the revolver that helped finance the Atlas acquisition.

The other bit of news was that the IRS will once again begin issuing Private Letter Rulings (PLRs). A company contemplating dropping assets into an MLP structure can approach the IRS and request a specific ruling on whether the proposed transaction will qualify as an MLP. The IRS had stopped issuing these almost a year ago so it could review the law and come up with coherent regulations to guide its decisions. The resumption of MLP related PLRs will be welcomed by companies whose planned drop-down transactions had been on hold during this period of time. In our view the trend had previously been towards a somewhat more liberal interpretation of the types of assets eligible to be placed in an MLP structure. So far there’s been no indication from the IRS about the results of their 11 month internal deliberations, so we’ll find out as new transactions are made public.

We are invested in KMI and TRGP.

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