As pass-through entities, master limited partnerships don't retain much cash relative to what they generate quarter after quarter, year after year. As a result, MLPs have to issue debt to fund growth, and they have to do it frequently. Given this reality, it's pretty easy to dismiss debt offering press releases when they come out, and many investors quantify their MLP's debt in rudimentary terms: It's either a lot or it's a little.
Today, we're digging into the recent debt offering from Buckeye Partners (NYSE:BPL) and using the partnership's release to develop an understanding of what happens when an MLP issues debt.
On November 6, Buckeye issued a short press release to fill investors in on its most recent debt offering. Here is the deal:
Buckeye Partners, L.P. ("Buckeye") (NYSE:BPL) announced today that it has priced an offering of $800 million aggregate principal amount of senior unsecured notes, including $400 million 2.650% senior notes due 2018 and $400 million 5.850% senior notes due 2043 at 99.823% and 98.581% of par, respectively.
A deal like this with two batches of notes makes it obvious that long-term debt carries a higher interest rate than short-term debt, in this case 2.65% compared to 5.85%. The longer it takes a bond to mature, the more risky it seems to buyers. Aside from duration, the issuer's credit rating will also impact interest rates.
The terms of the above deal are pretty straight forward, but if you're new to these offerings some of Wall Street's language may throw you for a loop, so let's pick out and decode the debt-related vocabulary:
Senior unsecured notes: This phrase means two things to bond holders. First, the "senior" implies that in the grand hierarchy of debt, this bond will be paid back before any subordinated bonds, regardless of when they were issued. Second, the "unsecured" simply means that this bond is not tied to an asset, so if the company is unable to pay it, you do not get to stake a claim on any physical property, cash, etc.
XX% of par: Par is just another word for the face value, or principal, of a bond. In this context, Buckeye uses the phrase "98.581% of par" to indicate it is selling its bonds at slightly less than face value. Issuers often do this to sweeten the deal for buyers. Regardless of this discount, Buckeye Partners will pay interest on the face value, and repay the principal in full at maturity.
The partnership's SEC filing breaks this out nicely, and it's always a good idea to look up the filing after a press release to get a complete sense of the terms of the offering.
How it all shakes out
As a result of this debt offering, Buckeye Partners will pay $53 million in interest by November 15, 2018, for the first group of notes, at which point it will repay the full face value of $400 million. Similarly, the partnership will pay $702 million in interest by November 15, 2043, when it will repay the other $400 million it owes for the second batch of notes.
You can see straight away how these transactions add up over time. The final cost for the original $800 million will be $800 million at maturity, plus $744 in interest, for a grand total of $1.54 billion.
Of course, Buckeye Partners is not the only MLP issuing debt. Let's look at some other recent offerings to see what else we can learn about debt.
On October 22, Crestwood Midstream Partners (UNKNOWN:CMLP.DL) priced $600 million of its 6.125% senior notes due in 2022. The partnership plans to use the proceeds toward its planned acquisition of Arrow Midstream and to pay down outstanding borrowings under its revolving credit facility. This brings up another important point: It's important to pay attention to what your partnership is doing with its debt. It's very easy to obsess over the numbers and miss the forest for the trees when an offering is announced.
On October 3, Magellan Midstream Partners (NYSE:MMP) priced $300 million in 5.15% senior notes due in 2043. You'll note that despite a similar dollar amount to the Buckeye deal and an identical maturity period, Magellan's interest rate is much lower at 5.15% than Buckeye's at 5.85%. Part of that reason is because Magellan sports a BBB+ credit rating from Standard & Poor's, while Buckeye Partners is currently rated BBB-. It may not seem like a great disparity, but every little bit counts when you're paying interest on millions of dollars.
Naturally, looking at just one offering only offers a glimpse into an MLP's debt story. Once you understand the fundamentals behind a debt deal, however, you can properly evaluate the multitude that are sure to follow in an industry that must borrow today to grow tomorrow.