Wednesday, 30 December 2015

Q: Why are Enbridge Corporate Bonds Trading Like Junk? A: Because they are

An observational post.

I was scrolling through the offerings in 5-10 year bonds at TD.  I happened across Enbridge's US$ pay 3.5% bonds, maturing in 2024. These are 8.5 year bonds.

I note a few things:

  1. These are bid to yield 6.29%, offered to yield 5.83%
  2. Closest comparable duration are Husky Energy 4% bonds, maturing in 2024, bid to yield/offer about 50 bps below Enbridge, due to higher coupon.  
  3. BofA M/L BBB effective yield has been creeping up all of 2015 (equity markets seem to be ignoring this).  Current BBB effective yield is about 4.44%, so these Enbridge corporates yield about 185 bps higher at bid, 139 bps at offer.  The difference has to be a function of both duration and credit quality.
  4. Equity has priced in deterioration as per below.  I've compared ENB's price performance to Kinder Morgan over the last 5 year's on a weekly basis.
  5. Enbridge is an absolute favourite to hold in long term / DGI portfolio's, and I ask myself, why? For equivalent to lower risk, investors can buy the bonds if (and only if) they do a sufficient analysis of credit worthiness and determine that the bonds are covered.  ENB looks like it has the makings of a Canadian Kinder Morgan situation, as does Transcanada in my opinion. What's going to get cut first equity, think about it...

Finally, the long term monthly chart:

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