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Junk energy companies rush to primary market

By Davide Scigliuzzo

NEW YORK (IFR) - Junk-rated energy companies are rushing to the US bond market at the fastest pace in nearly two years, looking to refinance debt following a sharp rally in spreads over the past week.

Permian Basin independent producer Parsley Energy and natural gas giant Chesapeake Energy are pricing deals Tuesday, and follow a bond from Cheniere Energy a day earlier which was increased to US$1.5bn from US$1bn on the back of strong demand.

At least two others - Rowan Companies and Matador Resources - are also marketing deals to the buyside.

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"They are definitely capitalizing on the market right now," Matt Kennedy, a senior portfolio manager at Angel Oak Capital Advisors, told IFR.

The companies - from across the oil and gas sector including drilling and transportation - are selling new debt amid renewed interest from investors in the wake of OPEC's agreement at the end of last month to cut production.

Since that announcement on November 30, junk-rated energy bond spreads have tightened by 71bp to 483bp over Treasuries as of the close Monday, according to Bank of America Merrill Lynch data. That marks the lowest level since October 2014.

US crude prices were dropped by almost 2% to US$50.43 a barrel on Tuesday, on skepticism the cartel would be able to reduce production. They were however still higher than before the OPEC announcement when prices were at US$45.23.

"As prices move up and US shale production rebounds it remains to be seen how sustainable prices are and how OPEC will respond," Kennedy said.

DEAL BONANZA

In all, the five energy borrowers coming to market this week could sell US$3.4bn of junk-rated bonds. That would make it the highest weekly volume for the sector since March 2015, according to an IFR analysis of data from Wells Fargo.

Rated Triple C by Moody's and S&P, natural gas producer Chesapeake Energy announced price talk of 8.25% area on a US$750m eight-year non-call three senior note.

That was tighter than mid-8% whispers, though the deal will price with an original issue discount of 1.5 points.

The deal - the first primary issue from the company in about two-and-half years, excluding exchange offers - will use proceeds to finance a tender on up to US$1.2bn of existing debt maturing from 2017 to 2023.

The deal is the latest in a series of liability management transactions and asset sales undertaken by debt-laden Chesapeake over the past year to increase its financial flexibility.

E&P company Parsley Energy and offshore drilling contractor Rowan Companies are also expected to tap the market on Tuesday with a US$600m eight-year non-call three and a US$400m 8.5-year bullet deal, respectively.

Parsley has set price talk of 5.5% area on its trade, while Rowan is eyeing a yield in the 7.5%-7.75% range.

Matador Resources, another independent E&P company, also plans to raise US$150m on Tuesday through a tap of its existing 2023s.

Cheniere Energy gave the market a big boost Monday, pricing a US$1.5bn 8.25-year bond sale for its Corpus Christi subsidiary to repay existing term loans.

The senior secured deal was upsized from US$1bn and priced at a final yield of 5.875%, tight to price talk of 6% area.

(Reporting by Davide Scigliuzzo; Editing by Natalie Harrison and Shankar Ramakrishnan)

 
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