Thursday, 31 December 2015

More on Enbridge

Yesterday's post got me thinking, why not look further at Enbridge's 3.5% 6/10/2024 bonds?

Here was yesterday's quote table courtesy of TD:

I wanted to put the quoted yield into context, so I did the following quick and dirty analysis, comparing ENB to TRP and to the US BBB corporate yield curve:

Key takeaways:

  • Total expected yield is about 8% in USD's, comprised of 2.22% in capital gains yield (compounded annually) and 5.79% YTM (if held in a tax deferred account).  This conclusion is simplistic though, as it does not take credit risk into account.  It assumes that these bonds will mature at par...
  • The BBB US corporate yield curve is around 4.5%.  So, these bonds yield 357 bps above compare USD BBB corporates.  As noted yesterday, part of the spread must be due to duration, part must be due to credit risk
  • When I see this large of a yield in the context of today's piddly yields (especially in USD's), I wonder if it's too good to be true (put another way, why am I the only clown noticing this)?
  • Interest coverage relative to TRP appears to have deteriorated recently, TRP had 3.3x interest coverage in 2014, vs. ENB at 2.83x.  Without fully analyzing the components of EBIT in either case, or without examining fixed charges and go forward capx, it's hard to draw meaningful conclusions regarding liquidity.  These steps are left to the discerning investor.
  • There really is no end to capx in both cases.  An investor interested in either the bonds or the shares should take an objective look at both capital structure and projected capx (see slides below).
  • BNN featured "professional" money managers will, for the most part, not clue into the danger here (until it's too late). Instead, they will talk about how "great" and "safe" a name Enbridge is. Don't believe me, see below?  

Here is the current capital structure, courtesy of Morningstar.  I've highlighted the two bigger bond issues coming due in 2023 and 2024 below, about $2B+ USD.

Here are a few excerpts from the company's 5 year strategic plan:

Here's what Enbridge has done recently in order to lower their overall cost of capital:

Key takeaways and concluding thoughts:

I have more questions than answers unfortunately.  The drop down appears to be a piece of financial engineering aimed at moving leverage away from ENB to ENF so that ENB can go out and raise $38B to spend more on capx.  Current EV is around $80B per yahoo finance (not sure if this includes the debt before the entire drop down transaction is completed).  Even so, ENB is proposing to spend $38B (as budgeted) equivalent to 50% of current pre drop down EV.  So my questions (if I were a stakeholder):

  • How are they going to raise $38B?  Certainly, if they want to maintain the current 80/20 D:E capital structure, they would raise $30B in debt, and $8B in additional equity.
  • Where does the old debt supporting the drop down program reside?  In ENF? Is ENB guaranteeing the ENF debt?  
  • Where will existing bondholders stand next to new bondholders in terms of seniority?
  • How are they going to finance payment of dividends of $1.86/sh on the additional equity to be raised if the new assets being built aren't going to throw off meanigful cash flows until they are put into service?  
  • What happens if the $38B capx budget is wrong?  What happens if it ends up being $45B?  Who makes up the difference?

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