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Friday, December 05, 2008

Nice rally underway with the dow up 150 and off its high. MLPS coming off the lows with the index still down 2 points. Energy as a whole continues to lag. Financials emerging as a leadership group in here. Could be a good intermediate term sign for the overall market if that continues.

1 comment:

Unknown said...

Fresh Money flowing at 10% ( estimated cost to EPD after underwiting costs ).

The good news is that EPD was able to sell 5 year notes at 9.75%.

The bad news is that if 10%is the new norm for a strong credit like EPD, some of the weaker MLPs might have to pay considerably more to obtain financing (if it's available to them at all).

Of course if EPD's previous cost of credit ( just a guess ) was 7% then this deal reduces EPD's distributable income by $15million a year if all of the $500 million was used to rollover older debt.

A $15 million increase in EPD's annual cost of debt service is not the end of the world, but EPD has 8.6 billion of debt ( perhaps 8.1 Billion after this last financing if it was used to rollover debt ).

Assuming that EPD's debt has an average duration of 5 years, that implies that 1.7 billion of Epd debt needs to be rolled over annually for 5 years at an increasing of financing cost of 51 million per year for 5 years.

EPD pays a distro of 2.09 a share X 435 million shares or about 909 million a year. An annual increase of 51 million a year in financing costs will likely reduce distro increases going forward considerably.

Of course there are some flaws in the above analysis.

1) Interest rates may normalize at lower ( or higher ) rates than 10%

2) EPD might find accretive deals at 10% financing costs.

3) Long term, it has paid to bet with Dan Duncan as opposed to betting against him.

My view is the market is pricing in the likelyhood of higher corporate financing costs going forward, and MLPs are suffering ( and will continue to suffer ) until investor perceptions about interest rates going forward changes.



HOUSTON--(BUSINESS WIRE)--Enterprise Products Partners L.P. (NYSE:EPD - News) today announced that its operating subsidiary, Enterprise Products Operating LLC, has priced a public offering of $500 million of senior unsecured notes due 2014. The proceeds from the offering are expected to be used to temporarily reduce borrowings outstanding under the partnership’s Multi-Year Revolving Credit Facility and for general partnership purposes.
Related Quotes
Symbol Price Change
EPD 19.82 +0.33

The notes will be issued at 100 percent of their principal amount and will have a fixed-rate interest coupon of 9.75 percent and a maturity date of January 31, 2014. The expected settlement date for the offering is December 8, 2008. Enterprise Products Partners L.P. will guarantee the notes through an unconditional guarantee on an unsecured and unsubordinated basis.