Kinder Morgan Inc El Paso Pipeline Partner Lp Ruby Pipeline

Source: Kinder Morgan.

Kinder Morgan (NYSE:KMI) is getting fed up with the fickleness of investors, both equity and credit. Its disdain for the latter was on full display this week, when the company decided to bypass the credit markets entirely when seeking funds to refinance maturing debt, instead taking its business directly to the bank. In doing so, it became just the latest energy company to forsake the capital markets because of how unreliable they've become during the downturn.

Taking it to the bank
Before the energy market meltdown of 2015, Kinder Morgan had no trouble accessing the debt or equity market. In fact, it did so quite frequently, issuing stock to give it the funds needed to build new projects while tapping the debt markets for additional funding for those projects, as well as to refinance maturing debt. However, with the energy market in turmoil it found neither market to be quite as open as before, even though its underlying business was only feeling a minor impact of the commodity price crunch.

In fact, the company still had a full slate of growth projects to build, which was actually starting to become a bit of a problem because its primary funding options were no longer available. That left the company with having to figure out a way to fund roughly $3.3 billion in projects and nearly $1.7 billion more in debt that needed to be refinanced in 2016. It was a problem that was mostly solved when the company reduced its dividend, which eliminated the need to go to the capital markets for debt or equity financing for its planned project investments in 2016. That said, it still had the maturing debt to address, which is the business it took directly to the bank this week.

The company was able to secure a new three-year, $1 billion term loan to be used to refinance the bulk of its upcoming debt maturities. The rest of the cash needed to refinance the upcoming maturities will be made up of a combination of borrowings under its newly expanded credit facility, as well as cash on hand. That credit facility, which currently has no outstanding borrowings other than $115 million in letters of credit against it, was expanded from $4 billion to $5 billion just to provide it a little extra liquidity. In fact, the company only expects to need $377 million of that capacity for the debt refinance, with the other roughly $300 million balance to be paid off with cash.

A growing client list
In going the term loan route, Kinder Morgan is joining a growing number of energy companies that have bypassed the capital markets and are going straight to banks for financing. One recent example is fellow midstream company ONEOK Partners (NYSE:OKS), which also secured a three-year, $1 billion term loan. ONEOK Partners expects that the proceeds from that loan, when combined with its own $2.4 billion credit facility, and a commercial paper program will enable the company fully fund its capital growth projects well into 2017 before it will need to tap back into the debt and equity markets.

Two other recent examples were oil and gas producers Noble Energy (NYSE:NBL) and Southwestern Energy (NYSE:SWN). Noble Energy turned to its banks for a three-year term loan worth up to $1.4 billion. Noble Energy plans to use that cash to buy back debt it assumed when it acquired Rosetta Resources. In doing so it will save $50 million per year in interest expenses because of the cheaper rates offered by its banks. Meanwhile, Southwestern Energy closed a three-year $750 million term loan last year. Southwestern Energy used that cash to pay down its credit facility as well as increase its liquidity.

Investor takeaway
With the capital markets no longer friendly, a growing list of energy companies, including Kinder Morgan, is turning to banks for funding. They're finding that the banks are much more reasonable partners, often offering much better rates than capital market investors. That said, none of these companies can go without access to the market forever, with each viewing these bank loans as a stop-gap measure, not a permanent financing solution.

Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Oneok Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.