Consolidated Energy’s new USD 1.075bn in financing will clear away near-term maturities and set the stage for de-levering, thanks to recovering methanol prices and the company’s new facility in Texas, according to four buysiders following the deal.

The methanol producer is in the market with a dual-tranche USD 525m bond along with a USD 550m TLB due 2025, proceeds of which will collectively refinance its remaining USD 496m 6.75% notes due 2019, as well as a USD 272m term loan and a revolver with USD 260m outstanding at subsidiary Methanol Holdings Limited (MHTL).

Lead bookrunner Morgan Stanley outlined price talk on the bonds this afternoon and simultaneously carved out a shorter-dated USD 100m floating-rate tranche. The now-USD 425m eight-year fixed paper is guided at 6.25%-6.5%, in line with whispers that circulated earlier this week, the sources said. The USD 100m four-year floating-rate tranche due 2022 is guided at Libor+ 375bps (0% floor) at par. The roadshow kicked off on Monday (30 April).

Talk on the 2026 notes offers a premium to Consolidated’s existing USD 500m 6.875% unsecured notes due 2025, which traded today at 104.125 to yield 5.927%, according to MarketAxess. The notes widened slightly since the financing plan was unveiled several weeks ago, having traded at 105 yielding 5.74% on 12 April. Consolidated just placed the 2025s last May, also to refinance debt.

The USD 550m TLB, also led by Morgan Stanley, was guided at L+ 250bps-275bps (0% floor) with a 99.5 OID. Commitments were due today.

The refinancing is leverage neutral, at around 7.38x, given USD 2.4bn in total debt and USD 325m in LTM adjusted EBITDA, the sources said. The leverage is high, they acknowledged, but the company is poised to de-lever by several turns over the next two years, as its recent investment in a new methanol production facility begins contributing to EBITDA. In addition to the syndicated loans and bonds, the capital structure also includes USD 320m of promissory notes and USD 223m of senior lien revenue bonds.

Consolidated in May 2016 acquired a 50% equity interest in a project started by OCI, called Natgasoline LLC, for USD 630m of equity and a USD 50m shareholder loan. For its part, OCI made a USD 1.9bn investment in Natgasoline, located in Beaumont, Texas and expected to be the world’s largest methanol production facility, as reported.

The Beaumont facility is expected to generate a total of USD 150m-USD 200m in EBITDA in 2018 and USD 300m in 2019 – half of which would flow to Consolidated. At that performance level, an additional USD 150m in 2019 EBITDA would bring Consolidated’s leverage down to the 5x area, the sources noted.

Consolidated should generate at least USD 164m in free cash flow (6.8% of debt) over the next year, assuming USD 400m in EBITDA less USD 80m in capital expenditure and USD 157m of interest expense, the sources estimated.

However, the company’s desire for expansion and growth could affect its capex in the future, they noted.

“There always seems to be another project that they want to develop,” said one buysider. “It will probably be half a year before they come back to market with another deal because of an idea that they put on the backburner for the Natgas deal,” he speculated.

Furthermore, the company’s bottom line remains at the mercy of methanol prices.

Prices for the commodity bottomed in early 2016 at about USD 75 cents per gallon and have since recovered to more than USD 1.40/gallon – but that could drop this year as new plants, including Natgas, begin producing more supply, according to a January Moody’s report about the industry. “2018 is likely to witness volatile conditions in methanol as new industry capacity comes online, but we do not expect pricing to return to the historical lows of 2016,” the report says.

In tandem with methanol price movements, Consolidated’s 2017 revenue jumped to USD 1.077bn, from USD 711.6bn in 2016.

Consolidated has also struggled with its exposure to natural gas as a feedstock, though that issue was largely one of procurement, sources noted. It faced shortages at its plants in Trinidad, leading two methanol facilities to go idle.

Two new developments should alleviate this problem. First, a new natural gas field off the coast of Trinidad owned by parent company Proman is set to open in 2018, according to company documents, which will allow the company to reopen the two methanol facilities. Meanwhile, the new Natgasoline facility will also diversify the geographic regions in which it’s manufacturing – and the Texas area has access to ample natural gas.

“A challenge for Consolidated Energy has always been whether or not they can get enough natural gas to produce,” said one buysider. “For years now, it’s been inadequate gas supply and production shortfalls. So now with Natgas, it seems like the picture is complete.”

Pro forma liquidity includes USD 184.7m in cash, USD 18.8m in restricted cash and USD 175m of revolver availability.

Besides Consolidated’s own 2025 bonds, OCI’s unsecured bonds also offer a comp for relative value, the sources noted. OCI’s BB-/B1 rated USD 650m 6.625% senior secured notes due 2023 traded today at 102.25 to yield 5.977%, according to MarketAxess – or as much as 50bps tighter than talk on Consolidated’s bonds.

OCI has unsecured ratings similar to Consolidated, but is a larger, more diversified operator, the sources said. Fertilizer makes up more of OCI’s business at 69% of its USD 2.25bn 2017 revenue, with 31% coming from methanol and melamine, whereas 80% of Consolidated Energy’s USD 1.077bn 2017 revenue came from methanol.

The two companies have similar leverage at around 7x, but OCI has more growth potential and could de-lever more quickly, sources added. OCI just issued its 2023 notes last month, pricing them significantly tight of talk in the low 7% area.

The company and Morgan Stanley did not respond to requests for comment.

2018 Debtwire