MEG Energy Seeks Leveraged Loan

The company, which is rated B3/BB-/B, could open the door for other leveraged energy borrowers to tap the loan market. These issuers are considered riskier than those rated investment-grade. Access to this pool of money has been largely shut off to the sector over the last year after oil prices started plummeting in 2014.

"Refinancing opportunities in the energy space are likely few and far between," said Chris Remington, institutional portfolio manager at Eaton Vance. "MEG is one of the standouts, where it's possible because it's an attractively capitalized company and demand for the loan is high."

Even with its well-known name and relatively strong financial profile, MEG made some moves to improve its credit before looking to get funding in the loan market. The company decreased the size of its revolving credit facility to US$1.4bn from US$2.5bn and extended the maturity by two years to 2021, issued equity, and refinanced unsecured bonds with longer-dated second-lien notes.

Despite these moves, the company will be paying a premium for its bank debt. Guidance is circulating in the 375bp over Libor area with a 1% floor while the existing loan is priced at 275bp over Libor with a 1% floor. This comes against a backdrop where issuers in other sectors have lowered pricing on US$40bn of loans so far this month alone.

The changes to its credit profile and additional interest have enticed investors, allowing the company to move up the deadline to commit to the financing by five days to Thursday.

However, bankers also warned that one issuer raising debt does not spell a healthy oil and gas loan market, especially since MEG is known among investors as the largest and most liquid Double B name in the sector.

"We are seeing green shoots, but we are not seeing tall elms," said one banker. "For now, it's going to be your MEGs and other big companies with a significant amount of capital and break evens that work accessing the market. Not every company looks like that."

 

Lean Lending
Leveraged lending to the oil and gas sector totaled just 4% of total loan volume in 2016, the lowest number since at least 2009 when Thomson Reuters LPC began tracking leveraged lending volume by sector.

Loans to oil and gas companies made up 6% of volume in 2015 and 10% of volume in 2014, when oil was trading well above US$100 per barrel. Oil prices dropped precipitously in 2015 to US$26 per barrel due to macroeconomic concerns and questions over demand. The price volatility turned banks and investors away from energy names. This year, the prices have stabilized around US$50 per barrel.

The fact that lending volumes to the sector are so low could make room in the banks' portfolios for more energy-related loans, said Gil Porter, partner at Haynes and Boone LLP at an energy roundtable in New York on Tuesday. He said that energy makes up just 7% of all outstanding loans in the leveraged lending arena, meaning that banks could start to increase their exposure.

"There seems to be a lot of headroom available to provide cash and capital to the oil and gas market," Porter said.

With oil stabilizing, private equity firms, with large amounts of cash sitting on the sidelines, may also see an opening and look to pull the trigger on buyout situations with the help from the banks that want their business.

"I think there is a lot of private equity money looking to be put to work in the oil and gas space, and the sponsors have relationships with banks that they are going to be able to utilize to help finance and hedge acquisitions," said David Locascio, a partner in the Hogan Lovells Infrastructure, Energy, Resources and Projects practice.

Already there has been a significant amount of activity in the bond market in energy with 17 bonds pricing totaling US$12.025bn since December 1, according to Wells Fargo (WFCNO), but given the secure nature of leveraged loans and investors' need to make sure loans have the right collateral, loan investors may be slower to jump in.

"I think it's selective and is going to be very credit based," a second banker said. "If you have the right characteristics you could have a successful loan deal in the space, but I don't think investors are dying to jump back in the pool. They'll be very cautious, and the market will develop over time."