Investor appetite in the high-yield market reached a limit after Sunshine Oilsands Ltd. (2012) of Canada pulled a proposed $325 million bond due to lack of demand from U.S. and Chinese investors.
The high-yield bond market, prepared to fund defaulters from Ecuador to Argentina, drew the line at Sunshine Oilsands, which sought bond financing to build out wells after running out of other means of support, said Geof Marshall, who oversees about $8 billion of high-yield bonds at CI Investments Inc.
“It is incredibly telling for a deal to fail in a frothy new-issue market,” Marshall said by phone from Toronto yesterday. “Bondholders should never lend to a company that cannot raise equity capital.”
China-backed Sunshine, based in Calgary, has been stymied by a lack of funds that’s delaying development of its first commercial oil-sands project, called West Ells. As recently as 16 months ago, the company forecast output would reach as much as 1 million barrels a day, making it one of Canada’s largest oil-sands producers.
Sunshine is targeting initial production of 5,000 barrels per day using steam to extract trapped reserves of bitumen at West Ells. It was seeking investors for a bond in the U.S. and Hong Kong to build out the well in the Athabasca region of Alberta, it said May 22.
The company, backed by China’s sovereign wealth fund as well as China Life Insurance Co., will continue to work with Imperial Capital Group Inc., Scotia Capital Inc. and Morgan Stanley to secure alternative financing through smaller deals, according to two people with direct knowledge of the deal who declined to be identified. Chief Executive Officer David Sealock didn’t respond to two voice mails left at his office seeking comment.
Songning Shen and Wazir Chand Seth resigned from the board, the company said July 6. Shen was previously co-chairman of Sunshine.
Chinese investment in Canada’s energy patch has tumbled following Cnooc Ltd.’s $15 billion purchase of Nexen Inc. in 2012. While the Canadian government approved the deal, it warned that it would only back additional Chinese bids for oil-sands firms in “exceptional cases.” Investment in Canada slumped to less than $1 billion last year, after a record $19.3 billion in 2012, according to data compiled by Bloomberg. China has invested about $37 billion in the industry since the beginning of 2008, the data show.
Chinese joint ventures and direct investments in Canada have suffered from weak returns by companies like Sunshine, Penn West (PWT) Petroleum Ltd. and Athabasca Oil Corp. Penn West has fallen 25 percent in the past two years, while Sunshine has dropped 52 percent this year. Athabasca (ATH) trades at less than half its initial public offering price.
China Investment Corp., one of the top shareholders of Sunshine with a 5.9 percent stake, was roiled last month by a report from the National Audit Office that the $575 billion sovereign-wealth fund was mismanaging its foreign investments. CIC, the world’s fourth-largest sovereign-wealth fund, was set up in 2007 to manage part of China’s foreign reserves.
Marshall of CI Investments was offered a coupon of 15 percent to buy Sunshine’s unrated five-year notes. That coupon compares with a market-weighted coupon of 8.8 percent for issuers in the Bank of America Merrill Lynch’s CCC & Lower Global High Yield Index, the lowest-rated category.
The last time a Canadian borrower had to abort a planned sale of high-yield bonds was in June 2013 when BlackPearl Resources Inc., an energy explorer, and Superior Plus Corp., a propane distributor, encountered Ben Bernanke’s so-called “taper tantrum.” The warning from the then-chairman of the Federal Reserve that stimulative monetary policies might be coming to an end sent yields soaring worldwide. Investors today have never been more welcoming to high-yield issuers.
Mark Pibl, the New York-based head of high-yield research and strategy at Canaccord Genuity Inc., said Sunshine’s failed transaction will make buyers more skeptical about early-stage producers in the future.
Sunshine started reviewing strategic alternatives including debt or equity financing and joint-venture agreements to fund West Ells and other projects in August. Lenders didn’t renew a C$200 million ($187 million) line of credit in November because of insufficient backstop funds.
“They have no revenues, they have negative” earnings before interest and taxes, Pibl said by phone from New York yesterday. “It’s insane they even thought they could raise this.”