Suncor Energy Inc. bond spreads are narrowing on speculation that Canada’s largest oil company may receive credit-rating upgrades next year as it pays down debt.
The extra yield investors demand to hold Suncor’s 6.1 percent debt due in June 2018 instead of similar-maturity government bonds narrowed by 68 basis points since February, according to Bloomberg data. The Suncor bond, with $1.25 billion outstanding, yields 4.39 percent, for a spread of about 150 basis points over government debt, according to Scotia Capital.
Suncor has been selling assets in regions including Alberta, the Netherlands and Trinidad and Tobago to pay down debt following last year’s C$25.9 billion ($24.7 billion) purchase of rival Petro-Canada. The Calgary-based company had net debt of C$13.2 billion at the end of March, according to company filings.
“Going into this merger, the intent was to de-leverage,” said Matthew Kolodzie, a credit analyst at RBC Securities in Toronto. “That’s kind of been baked into the ratings.”
Standard & Poor’s may boost Suncor’s rating one level to A- by the end of 2011, bringing the rating back to where it was before the Petro-Canada acquisition, according to analysts at Scotia Capital.
“Bond investors will likely see some upside in ratings in the (second half of 2011) as Suncor’s credit profile improves from debt reduction,” Scotia Capital wrote in a July 2 note to investors.
At a spread of 150 basis points, Suncor is already trading at about the level of an A1 rated company, based on the Moody’s Investors Service ratings, according to a Bank of America Merrill Lynch Index. That’s four levels above Moody’s current rating of Baa2 for Suncor.
The 2018 bond has returned about 15 percent in the last year, outperforming both the Merrill Lynch Canadian Corporate Index and the Bloomberg/EFFAS Bond Index.
Elsewhere in credit markets, Royal Bank of Canada plans to sell $1 billion in bonds denominated in U.S. dollars due December 2015, according to a banker involved in the sale. Goldman Sachs Group Inc. and JPMorgan Chase & Co. will manage the sale with RBC Capital markets, the banker said. The notes may pay about 90 basis points more than U.S. Treasuries. A basis point is 0.01 percentage point.
Canada auctioned C$3 billion of notes maturing in two years, drawing an average yield of 1.565 percent, the central bank said.
Bank of Montreal reduced its forecast yesterday for how fast Canada’s central bank will raise interest rates. The Bank of Canada will increase its key rate to 1 percent at the end of the year from today’s 0.5 percent, said economist Michael Gregory. A June 3 prediction was for 1.25 percent.
Standard & Poor’s wrote in May that “a positive rating action is possible” should Suncor reduce its debt to less than two times its earnings before interest, taxes, depreciation and amortization. Michelle Dathorne, a credit analyst in Toronto at the ratings company, declined to give a specific timeframe.
“The debt has to come down before there can be any improvement on the rating,” Dathorne said in a telephone interview. “We feel that they’re comfortably positioned at the BBB+ rating over our forecast period, which is 24 months.”
Suncor agreed to sell natural gas properties in British Columbia for about C$390 million in February. Last month it sold assets in Alberta to Abu Dhabi National Energy Co. for C$285 million, and sold Dutch assets for $400 million to Dana Petroleum Plc.
Sneh Seetal, a Suncor spokeswoman, declined to comment.