Third Avenue Leads Bull Bets on Oil Sands: Canada Credit

Canadian oil-sands producers, after being denied funding last year as energy prices fell, are regaining access to lenders as demand for speculative-grade debt surges with central banks suppressing borrowing rates.

Debt issuance and loans to junk energy companies from lenders ranging from Third Avenue Management LLC to Credit Suisse Group AG has surged 74 percent this year to $8.9 billion from the year-ago period, according to data compiled by Bloomberg. Calgary-based Sunshine Oilsands Ltd., which failed to renew a credit line last year, is marketing $325 million of bonds. BlackPearl Resources Inc. expanded a loan in April, 10 months after market conditions forced it to abandon financing.

“Central-bank policy is pushing investors further down the credit curve,” said Nicholas Leach, who manages about C$2.5 billion ($2.3 billion) in Toronto at CIBC Asset Management Inc., in an e-mail message yesterday. “In this environment, there are lots of investors willing to take on that kind of risk.”

Average yields on junk bonds from the U.S. to Europe and Asia reached a record-low of 5.3 percent yesterday, down from 10.4 percent in 2011 and below an average of 8.8 percent during the past 10 years, according to Bank of America Merrill Lynch index data. Average yields on debt rated CCC and below were at almost the record low of 8.9 percent, or what investors were getting just three years ago from BB rated companies on the cusp of investment grade, Merrill Lynch index data show.

“If I’m a hedge fund or a real active money manager, I need to play more stressed names and off-the-run names to meet my return hurdles,” Mark Pibl, the New York-based head of high-yield research and strategy at Canaccord Genuity, said by phone yesterday. “That’s what’s underscoring demand.”

Energy Prices

Canada’s energy sector also is attracting investors amid higher fuel prices and a weaker dollar, which boosts returns for exporters. Canadian natural gas prices have risen 25 percent from a year ago after a cold winter tapped into stores of heating fuel, and heavy-crude prices have risen 15 percent as producers ship on trains to avoid pipeline bottlenecks.

The Canadian dollar has weakened 5 percent versus its U.S. counterpart in the past year.

Borrowing by all other Canadian junk-rated companies outside of the energy industry was flat at $28 billion, the data compiled by Bloomberg show. BlackPearl, based in Calgary, saw its bank line expanded 30 percent to C$150 million from lenders led by Alberta Treasury Branches after lack of funding last year forced it to halt development at the Onion Lake heavy-oil project in Saskatchewan. The company canceled a $350 million loan last June, citing volatile debt markets.

Sunshine Bonds

“The general mood overall for the energy sector for money coming out of both New York and Toronto has improved, period,” said Bruce Edgelow, vice president of energy in Calgary at ATB Corporate Financial Services, which arranged the credit line expansion for BlackPearl last month. “The market view is that there are a fair number of these economic numbers that have firmed up.”

Sunshine, borrowing to develop oil-sands fields that haven’t started producing, said last week it plans to issue a $325 million bond. That’s after the company’s C$200 million line of credit wasn’t renewed last year.

Investors including Third Avenue Management, the New York-based fund, have taken positions in small oil-sands companies in recent months. Third Avenue is the largest bondholder in Calgary-based Southern Pacific Resource Corp., with a 12 percent stake, according to a Jan. 31 filing.

Bridget Wysong, a spokeswoman for Third Avenue, declined in an e-mail to comment.

Moody’s View

Credit Suisse arranged C$290 million of funding since the end of March for CCC+ rated Connacher Oil and Gas Ltd. and CCC rated Southern Pacific, Calgary-based oil-sands companies that borrowed in the early stages of development to foot escalating project costs. The ratings are seven and eight steps below investment-grade, respectively.

Connacher isn’t able to meet interest payments on C$900 million of bonds and maintain spending with pre-tax earnings, Moody’s Investors Service said in a May 7 note reiterating the company’s Caa2 rating, eight steps below investment-grade, and negative outlook. It described Connacher as “a small exploration and production company currently producing about 13,000 barrels per day.”

Lead Time

“The difficulty with these smaller startup oil-sands companies is that there’s a very long lead time between construction and production,” Terry Marshall, senior vice president at Moody’s in Toronto, said by phone yesterday. “We’ve seen difficulties with companies like Connacher that have never come close to their initial design capacity.”

Connacher Chief Executive Officer Chris Bloomer said he’s taking steps to address the liquidity concern and that production is increasing.

“The issue is the balance sheet, and we will deal with it,” Bloomer said in an e-mail today. “We are a very good company with a balance-sheet challenge.”

Dave Sealock, Sunshine’s interim chief executive officer, didn’t immediately return a voice message; nor did Greg Foofat, a spokesman for Southern Pacific; and Don Cook, chief financial officer of BlackPearl.

“The Canadian energy sector last year was a little bit out of favor” with U.S. investors, said Erik Charbonneau, head of Canadian capital markets at Credit Suisse in Toronto, noting that generally, the Canadian dollar’s weakness has drawn U.S. investors. “That flow has reversed itself this year.”

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