North America Loan
Takeout triumph: A clear takeout strategy is critical when arranging multibillion dollar M&A loans, particularly when an ambitious non-investment grade company is trying to convince high-grade lenders to back its acquisition of a moving target. For its size, seamless execution and an intelligent takeout strategy, Kinder Morgan’s US$13.3bn financing is IFR’s North America Loan of the Year.
To see the full digital edition of the IFR Review of the Year, please click here.
Few recent deals come close to matching the US$13.3bn loan package that helped finance Kinder Morgan’s US$38bn acquisition of Texas-based El Paso Corp and created the third-largest US energy company with an enterprise value of around US$94bn.
The loan was the largest sole underwriting ever for a US non-investment grade company and the second-largest sole underwriting ever for a US loan in any ratings category.
This would have been a gutsy call at the best of times but the decision to underwrite was taken in the difficult third quarter of 2011 in weakening markets as global volatility soared, gas prices slumped and bank funding costs spiralled. Kinder’s acquisition of El Paso was not to close until May 2012.
The takeout strategy was the key that allowed Kinder to tap the bank market for a jumbo loan that any other Double B rated company would have to find in the more expensive US institutional market.
To gather support, the ability to communicate the asset sale strategy and loan repayments to Kinder’s relationship banks was key. Having a go-to bank that could back sizeable commitments with good advice was also of paramount importance.
Kinder Morgan found this in Barclays, which acted as the company’s financial adviser during the transaction, and was also the lead arranger and sole bookrunner for the US$13.3bn loan.
”It was a case of looking at the markets at the time and taking advice from Barclays on where we thought we could get this initially syndicated and get the right pricing. At that point in time the market was not in perfect shape,” said David Kinder, Kinder Morgan’s vice-president, corporate development and treasurer.
The conversation between Kinder Morgan and Barclays started in September 2011 and the financing was quietly assembled in the next six weeks. Speed and confidentiality was essential as Kinder wanted to buy El Paso before El Paso completed its spin-off into two companies in order to prevent rivals such as TransCanada Corp, Energy Transfer Partners or Williams Co from getting in the way.
“To be able to keep quiet … it’s just absolutely critically important. We are very good at that. We treat confidentiality with huge respect and clients trust us on that,” said Jonathan Burn, Barclays head of investment-grade loan syndicate, Americas.
In the end, Kinder’s US$26.87 a share bid triumphed and the US$38bn acquisition was announced in October 2011. The debt package included a US$1.5bn senior revolving credit facility, a US$6.8bn, 364-day term loan and a US$5bn, three-year senior term loan.
To repay that debt Kinder had to complete two rounds of asset sales – the exploration and production business that El Paso had originally planned to sell and a second tranche of assets relating to El Paso’s mainstream and pipeline business.
Making sure that lenders understood the takeout strategy was vital, as banks were re-evaluating lending relationships as funding costs and market volatility spiralled higher.
“They [banks] were making big commitments. How were they going to de-risk? In what period of time? With what degree of confidence? That was important not just to the company and to us, but to the rest of the market,” said Claire O’Connor, Barclays’ head of loan capital markets, Americas.
The sale of El Paso’s exploration and production business for US$7.2bn to an Apollo-led group in February repaid the US$6.8bn bridge loan. The remaining assets which were sold throughout 2012 from Kinder’s parent company to the master limited partnerships Kinder Morgan Energy Partners and El Paso Pipeline Partners were used to part-repay the US$5bn term loan.
Approximately US$2.7bn of the US$5bn term loan was outstanding as of mid-November.