Bond Upgrades Help Commodities Firms -- WSJ

Pressures can ease, and debt prices rise, letting companies borrow more cheaply

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 4, 2017).

Commodity-related firms and their investors are reaping the rewards of a record stretch for corporate-bond upgrades.

Natural-gas exporter Cheniere Energy Partners LP and oil refiner Andeavor Corp. are among the companies whose ratings have climbed, pushing a combined $91.7 billion onto Bank of America Merrill Lynch's investment-grade corporate-bond index from its high-yield index over the 12 months ended June 30. Energy and basic-materials businesses accounted for 85% of the bonds moving between the indexes.

The upgrades have boosted bond prices, opened some companies to lower-cost borrowing and helped bolster balance sheets. It is a reversal of recent years in which slumping commodities shut many of the largest producers out of the high-quality bond market.

Finance chiefs across the industry responded to that slump by slashing costs, selling assets and buckling down on operational improvements to revive profit margins and reduce debt.

At the same time, a rebound in resource prices and a stronger global economy improved company balance sheets and helped propel the broader wave of upgrades.

Cheniere Energy's first upgrade, from S&P Global Ratings last September, attracted attention from Todd Schomberg, senior portfolio manager at Invesco Ltd., which manages around $858 billion. Mr. Schomberg invests in companies likely to transition to investment grade because of prudent financial management or improving economic conditions, known as "rising stars" in the bond world.

He purchased outstanding bonds from Cheniere earlier this year, betting that the company's debt would rally to reflect its improved credit rating. Cheniere bonds due in 2022 traded recently for 113.53 cents on the dollar, up from 109.50 at the start of 2017, just before a second upgrade in January, according to FactSet.

An upgrade "shows discipline and it shows a commitment to a conservative balance sheet," Mr. Schomberg said.

Receiving an investment-grade rating was "like flipping a light switch" for natural-gas exporter Cheniere Energy Partners, said Michael Wortley, finance chief of parent company Cheniere Energy Inc. Most natural-gas suppliers immediately stopped requiring upfront payments, freeing up hundreds of millions in capital for the largest buyer of natural gas in the U.S., Mr. Wortley said.

Along with the potential for lower rates on bonds or credit lines, investment-grade status allows companies like Cheniere to issue bonds due in decades rather than years.

They also have an easier time accessing funding because investment-grade bond markets are relatively liquid, and their low credit risk means they aren't required to post a deposit or pay upfront for certain business transactions.

"It just takes a lot of pressure off our business," Mr. Wortley said.

Cheniere tapped the investment-grade debt market for the first time in February. The company issued its longest and lowest-cost bonds -- $800 million of senior secured notes paying a 5.0% coupon due in 2037 and $1.35 billion in senior secured notes paying a 4.2% coupon and due in 2028.

A company's average score among the three major credit-rating firms must reach investment grade for its debt to shift to Bank of America's high-grade index. That means that the bonds are typically being upgraded by at least two ratings firms.

For oil refiner Andeavor, previously known as Tesoro, the upgrades meant its $3 billion revolving credit facility is now entirely unsecured, meaning it isn't guaranteed by assets or other collateral, finance chief Steven Sterin said in an email.

Andeavor has roughly $7.6 billion in debt that it plans to refinance over time, saving the company $75 million to $115 million in annual interest costs, he said. In addition to lower borrowing costs and less restrictive lending terms, Andeavor can now issue bonds maturing in 30 years, a big change from eight to 10 years previously.

"This meaningfully reduces refinance risk for the company," Mr. Sterin said.

Write to Tatyana Shumsky at tatyana.shumsky@wsj.com

(END) Dow Jones Newswires

August 04, 2017 02:48 ET (06:48 GMT)