Despite Ferrellgas LP’s high pro forma leverage and the cyclicality of the propane business, the bond deal to support its balance sheet restructuring has drawn investor interest in large part due to a substantial capital cushion beneath the new notes, according to five sources following the deal. The notes were accelerated to today from tomorrow’s initial commitment deadline, two of the sources added. 

Although the issuer, which provides Blue Rhino propane tanks, got an earnings bump from pandemic lifestyles as its customers spent more time at home, many high yield investors don’t see a clear path to deleveraging from its pro forma 7x area, three of the sources said.  

Led by JPMorgan, the company is marketing B-/B3 rated USD 1.475bn of senior unsecured notes split between a five-year non-call two tranche and an eight-year non-call three tranche. 

The five-year notes are talked at 5.25%-5.5%, tight of whispers in the 5.5% area, while the eight-year notes are talked at 5.75%-6%, tight of whispers in the 6% area.  Books close at 3pm ET, with pricing expected thereafter. 

At launch, the bank said the book already contained roughly USD 1bn of orders via reverse inquiry from existing Ferrellgas bondholders, and it’s now oversubscribed, two of the sources said. 

Ferrellgas LP’s parent company, Ferrellgas Partners LP, filed for Chapter 11 in January with a plan to equitize USD 357m MLP notes. At the same time, the company outlined an out of-court restructuring for the non-debtor opco (Ferrellgas LP), in which new notes and preferred equity would be issued, with proceeds used to address USD 700m in first lien notes and USD 1.475bn in unsecured notes at the entity.  

JPMorgan and Ares Management are providing the USD 700m in preferred units, which will mature in 10 years and will receive cash coupons with an option to PIK. 

As such, pro forma the opco restructuring, the entity’s debt will decrease to USD 1.475bn, from USD 2.179bn. That puts leverage at 5x through the bonds – or 7.4x including the preferreds – based on USD 294m of LTM 31 January adjusted EBITDA.  

The adjusted EBITDA figure marks an improvement from USD 266m in fiscal 2020 (ended 31 July, 2020), USD 230m in FY19, and USD 229m in FY18, which the company credits to the impact of the pandemic.  

For the six months ended 31 January 2021, the company generated USD 175m in adjusted EBITDA, compared to USD 146.5m for the same period in 2020.  

Sources estimate that if the company’s metrics stay as they are, it will generate roughly USD 74m of pro forma free cash flow, given USD 294m of adjusted EBITDA less USD 75m of capex and USD 145m of interest expense.

If it fully draws the holdco revolver, it would need an additional USD 10m to support interest payments, bringing free cash flow to USD 64m, the sources added. 

However, if adjusted EBITDA returns to the 2018-2019 area, leverage would be 6.4x through the bonds and 9.5x through the preferreds, with free cash flow at roughly break-even, three sources said. 

“If you’re investing in this deal, your best bet is to hope that things stay exactly as they are, meaning leverage doesn’t increase and you can still keep clipping your coupon,” one of the sources said. 

Meanwhile, the indenture will allow for roughly USD 200m in secured debt capacity that can be incurred in the future, two of the sources said. 

As such, some sources not participating in the deal at current whispers suggested a price point at least 100bps wider, closer to the 7% area, given the likelihood of credit deterioration, three of the sources said. 

Relative value-wise, fellow propane distributor Superior Plus’s USD 600m 4.5% senior unsecured notes due 2029 – issued in March and rated three notches higher than Ferrellgas at BB-/Ba3 – traded today at 101.25 to yield 4.05%, down from trades around 102.25 to yield 3.7% in early March, according to MarketAxess. 

And crossover rated Amerigas’ Baa3 rated USD 675m 5.875% senior unsecured notes due 2026 traded today at 109.25 to yield 3.885%, compared to trades at 112.5 to yield 3.249% in early March.  

Pro forma liquidity totals USD 278.5m through USD 67.3m of cash and USD 211.2m of revolver availability. 

JPMorgan and Ferrellgas did not respond to requests for comment.

2021 Debtwire