Despite its status as a repeat issuer in the high yield market, Calumet Specialty Products is receiving a tepid buyside reception for its bond offering this time around, following recent volatility in the energy sector, according to six sources following the deal.
The Caa1/B- notes have taken some time to garner interest. Calumet initially held investor meetings to gauge market appetite for a deal a few months ago, two of the sources said. Barclays Capital and Bank of America, who are also leading the proposed issuance, led the charge at the time, they noted.
The specialty hydrocarbon and fuel product producer officially kicked off a week-long roadshow for the USD 550m senior unsecured notes due 2025 on Monday (23 September), with pricing expected tomorrow. Still, Calumet may need participation from existing holders to push the deal over the line, four of the sources said.
Whispers have circulated in the 10%-11% area, with no price talk yet tied to the offering, three of the sources said. Along with USD 170m of cash and USD 100m of revolver borrowings, proceeds from the deal are slated to redeem the company’s outstanding USD 810m 6.5% senior unsecured notes due 2021.
The deal comes at an unstable time in the energy space as drone attacks on facilities in Saudi Arabia’s oil-rich Eastern Province and rising US-China trade war tensions threaten to push oil prices even lower, the sources said. WTI crude was last quoted at USD 55.73 per barrel today, after hitting a recent high of USD 62.90 per barrel in mid-September.
Volatility in the industry is translating to energy servicers such as Calumet contending with less demand for work from E&P clients, which strive to live within cash flow amid an uncertain commodity environment, the sources said.
The offering is not entirely opportunistic, with a maturity in early-2021 and the risk of a recession looming, three of the sources said.
“They have a little over a year before the 6.5% notes mature, so it’s not completely out-of-line to take care of this right now, but in hindsight, they should have come earlier when oil was performing better,” one of the sources noted. “They also should get it done now, just in case oil tanks further or a recession comes sooner-than expected.”
In exchange for a longer maturity, the new notes offer roughly a 300bps-350bps premium to the 2021 notes, according to MarketAxess.
The USD 810m 6.5% notes due 2021 softened to trade at 98.25 with a 7.716% yield yesterday, from par on Friday (20 September), according to MarketAxess. Its USD 350m 7.625% senior unsecured notes due 2022 last traded yesterday at 95.5 to yield 9.848%, while its USD 325m 7.75% senior unsecured notes due 2023 last traded yesterday at 92.375 to yield 10.369%.
Calumet’s leverage pro forma the deal would stand at roughly 4.5x, with USD 1.3bn of total debt and USD 287m of LTM adjusted EBITDA, versus 5.1x as of 30 June. Sources expect the company to generate roughly USD 147m of cash in 2019 (11% of total debt), based on USD 287m of adjusted EBITDA, 50m of capex and USD 90m of pro forma interest expense.
The company currently has USD 473.5m in liquidity, according to company documents. In conjunction with the bond in the market, Calumet announced a USD 100m expansion of its ABL, keeping pro forma revolver availability at USD 300m. Along with USD 3m of cash, total pro forma liquidity is USD 303m.
Management officials on the company’s 2Q19 earnings call in August noted that Calumet needs to maintain at least USD 250m of total liquidity to keep the business running.
Calumet’s closest comp is TPC Group— levered roughly 5x— which last tapped the market in July 2019 with a USD 930m 10.5% senior secured notes due 2024 on the promise of a turnaround story, two of the sources said. Those notes last traded yesterday at 105.75 to yield 8.702%, in line with recent levels, according to MarketAxess.
A representative from Calumet declined to comment. Barclays declined to comment.