Occidental Petroleum is looking to come to market this week with a jumbo bond deal, but faces a volatile market reacting to new tariff treats and the Federal Reserve’s recent rate cut.
The Texas-based oil company won a bidding war against Chevron earlier this year for the acquisition of Anadarko, but levered up significantly with added cash in order to get the US$38bn buyout over the finish line.
To fund the cash portion of its acquisition, Occidental held fixed-income investor calls on Thursday and Friday to term out the US$13bn bridge loan put in place by Bank of America Merrill Lynch and Citigroup.
But the market on Monday was not conducive to new issuance as just one borrower announced an under-benchmark-sized tap after secondary spreads widened by as much as 14bp-17bp among the most actively traded bonds, according to MarketAxess data.
Spreads were reacting to President Donald Trump’s threats to impose new tariffs on Chinese goods, which sent the DOW down more than 800 points.
“In a market environment like this, with a deal this size and the fact that they have levered up to do it, means it would probably have to come relatively cheaply to get done,” said Michael Collins, senior portfolio manager at PGIM Fixed Income.
“They will probably have to do it at wider spreads than they thought they would a week ago, and that goes for any credit coming with a big deal this week.”
Occidental will not only have a volatile market to contend with, but also its own deteriorating credit profile.
Shortly after the announced bond funding, Moody’s cut Occidental’s long-term credit rating by three notches to Baa3 from A3. S&P and Fitch, A/A, are expected to follow suite.
“While the acquisition will strengthen and diversify OXY’s upstream and midstream asset base, adding further scale to its already large position in the Permian Basin, the significant increase in debt leaves the company with less flexibility to confront commodity price volatility,” said Andrew Brooks, Moody’s vice president.
The rating agencies, however, are likely to give the company time to execute on its deleveraging plan before entertaining a downgrade to junk, CreditSights noted.
Still, there are some things going in favor of the deal.
Although the average yield on US IG fixed income has declined to its lowest point since September 2017 at 2.43%, average non-US IG fixed income yields have collapsed to a record-low 0.32%, according to BAML research.
Foreign bond investors such as insurance companies have to meet certain minimum yields and they may be forced into taking risks in names like Occidental to meet those requirements.
“We think foreign fixed-income investors have no choice but to take more risk,” BAML wrote in the report.
“That means more unhedged money entering the US bond market and, especially, the US corporate bond market.”
Occidental’s credit story also benefits from its successful sale of Anadarko’s African assets to Total Capital for US$8.8bn. That transaction was also funded in the US bond market in June. nL8N2495AL
The sale allowed Occidental to reduce its bridge loan to US$13bn from US$21.8bn.
Additionally, Ecopetrol announced it would pay Occidental US$1.5bn for a 49% stake in the 97,000 Midland acres.
“Achieving the full complement of US$10bn-US$15bn of projected asset sales for debt reduction in the near term, are fundamental to credit accretion from the weak level which the terms of OXY’s acquisition have imposed on the company,” Moody’s wrote in its report.