As the first US issuer to bring a high yield bond since 29 November, the Targa Resources driveby was met with overwhelming demand by investors watching for signs of more deals to come. However, the midstream producer will pay a premium for its oil and gas exposure and for breaking open the paralyzed market, according to multiple buyside and sellside sources. 

Although high yield investors are itching to put their cash to work, this BB-rated deal may not mean the new issue market is wide open yet for lower-quality credits, especially with the risk of more macroeconomic volatility and fluctuations in the price of oil on the horizon, said the sources.

Targa fits the profile for early 2019 issuers given the higher ratings and its upcoming maturity this year that needs to be addressed.

“This deal shows the market is modestly open, but the early round of new issuers will probably have to price at nice discounts,” said a buysider. “For those with 2019 and 2020 maturities, and loans that got hung up, they are watching.”

Led by BofA Merrill Lynch, Targa launched final pricing for a USD 750m senior unsecured deal due 2027 at 6.5%, tight of official talk in the 6.625% area. Thanks to investor demand, BofA added an upsized second tranche in the afternoon of USD 750m senior unsecured notes due 2029 that launched at 6.875%, in line with official price talk in the 6.875% area.

Proceeds will be used for general corporate purposes, which may include working capital, funding growth investments and acquisitions, and repaying existing debt, including notably the partial or full redemption of the outstanding USD 749m 4.125% senior unsecured notes due 15 November 2019, which traded today at par, up from 99.875 yesterday and the 99 area throughout December, according to MarketAxess.

At a 6.5% coupon, the Ba3/BB 8.5-year tranche offers investors a premium of almost 100bps to Targa’s existing USD 1bn 5.875% notes due 2026, which traded today at 101.625 to yield 5.513%, tighter versus 96.75 yielding 6.44% on 3 January, according to MarketAxess.

The new deal is also at a premium to Targa’s USD 500m 5.375% senior unsecured notes due 2027, which traded Tuesday (8 January) at 96.875 to yield 5.867%. 

The upsizing also signals the high yield market is thawing, sources said. “We’re hoping this opens up the market…that this is the deal to assuage other issuers and banks that it’s okay to come to high yield again, but they may just have to pay a little more,” said a sellside origination source.

The rally over the last week has brought the effective yield on the ICE BofAML US High Yield Master II Index back to early-December levels. The effective yield was 7.13% yesterday (9 January), a yield last seen on 4 December. It hit a peak at 8.05% on 26 December. 

For relative value to Targa’s new bonds, buysiders pegged Targa to price wide of fellow midstream operators 4.1x-levered DCP Midstream and 4.7x-levered NuStar Logistics.

DCP’s Ba2/BB USD 500m 5.375% senior unsecured notes due 2025 last traded today at 101.25 to yield 5.14%. NuStar’s Ba2/BB USD 550m 5.625% senior unsecured notes due 2027 last traded yesterday (9 January) at 95.75 to yield 6.289%, according to MarketAxess.

Targa’s target

As a midstream company, Targa is more insulated from the impact of volatile oil price than E&P names. Still, combined with the recent rise in oil prices, it could begin to crack the window open for better-quality E&Ps, sources speculated.

“As long as production’s not falling…[Targa is] fine,” said a buysider.

Pro forma the deal, Targa’s liquidity increases to USD 2.27bn with USD 931.6m in cash and USD 1.34bn of availability on a USD 2.2bn revolving credit facility due 2023, up from USD 1.53bn of liquidity before the transaction, according to deal documents.

The company is in the middle of an expansion project and will continue to burn cash even though organic growth capex will decrease to USD 2bn in 2019 from USD 2.4bn in 2018. In FY19, Targa will burn roughly USD 855m of cash, using Street-estimated USD 1.534bn in adjusted EBITDA, about USD 2bn of capex, according to guidance, and estimated USD 389m pro forma interest expense, not factoring in future debt repayment.

“[They] will start to reap EBITDA and revenue contribution from the extra capex from extra pipelines and processing plants,” a buysider said.

Before factoring in debt repayments, the deal increases total leverage by more than a turn to 5.9x, based on USD 7.56bn in pro forma total debt and USD 1.28bn of LTM 30 September adjusted EBITDA, according to deal documents.

BofA declined to comment. Targa did not respond to a request for comment.

2019 Debtwire