Bonds of oil and gas pipeline company Kinder Morgan Inc rallied Monday on expectations that its credit ratings would be boosted to investment-grade following a US$70bn deal to bring all of its publicly traded units into one group.
Kinder Morgan's 5% February 2021 bonds jumped to 107 from 101.5 on Friday, while the 5.625% November 2023 bonds rose to 108.5 from 102.5, according to a trader.
Another trader said Kinder Morgan Energy Partners long-dated 7.75% March 2032 bonds jumped 15 points to a cash price of 125.5, while its shares soared by almost 20%.
The moves follow an announcement Sunday that Kinder Morgan would shed the tax-advantaged Master Limited Partnership (MLP) legal structure it had popularized during the US shale boom, and fold its units into one company with a market capitalization of US$92bn.
The affected units include Kinder Morgan Energy Partners LP, Kinder Morgan Management, and El Paso Pipeline Partners.
CreditSights analysts said the mega merger would send Kinder Morgan Inc's speculative grade Ba2/BB/BB+ ratings by Moody's, S&P and Fitch respectively, into investment-grade territory - probably low BBB and eventually mid-BBB in a year of so.
"Leverage will be high but we expect Kinder Morgan Inc has pledged some debt reduction with excess free cash flow in order to get the investment-grade blessing of the agencies," said CreditSights analysts Andy DeVries and Charles Johnston.
Kinder Morgan was taken private by private equity investors including Carlyle Group and Goldman Sachs in a US$22bn leveraged buyout in 2007 - the sixth biggest LBO on record at the time - and made its debut in the stock market in 2011.
"We can't help but point out Kinder Morgan is probably the only US$10+ billion LBO of the 2005-2008 LBO boom where legacy bondholders will now have their pre-deal investment grade ratings restored," The CreditSights analysts said.
The combined entity will have an enterprise value of around US$140bn based on Friday's closing prices.
Reporting by Mariana Santibanez
