Apollo Sweetens Jupiter Terms as Gas Prices Wane: Canada Credit

Apollo Global Management LLC is sweetening the terms of a junk bond funding a C$2 billion ($1.8 billion) bet on a recovery in natural-gas prices and its first acquisition of Canadian gas assets.

Apollo’s Jupiter Resources Ltd. revived the $1.13 billion offering after shelving the deal in August, and increased the yield on the eight-year notes to a range of 8.5 percent to 8.75 percent, from 8.25 percent in August, according to people with direct knowledge of the transaction who couldn’t be identified before terms are public. Proceeds will fund the C$2 billion acquisition of Bighorn fields in west-central Alberta from Encana Corp., scheduled to close at the end of September.

“There is some fatigue in energy issuance,” said Geof Marshall, who oversees about $8 billion of high-yield bonds in Toronto at CI Investments Inc. and has a smaller allocation to energy companies than suggested in benchmark indexes used to measure performance. “The market feels pressured by supply.”

Apollo, the private-equity firm run by financier Leon Black, is raising the funds to build natural-gas producer Jupiter from scratch, providing capital to Alberta’s energy patch when limits on ownership by state-owned enterprises slow investment from China. Bighorn marks Apollo’s second energy deal in Canada this year. In May, Apollo invested C$500 million in a partnership with CSV Midstream Solutions Corp. in the Western Canadian Sedimentary Basin.

Revised Covenants

In addition to increasing the yield on the Jupiter bonds, Apollo made improvements to some of the covenants, or safeguards, for bond investors. Revised covenants limit Jupiter’s ability to take on more secured debt beyond a $1 billion credit facility, one of the people said. Jupiter is also foregoing $50 million it sought in the earlier deal for extra restricted payments.

Jupiter is one of four energy companies selling $6.75 billion of high-yield bonds in the U.S. this week. California Resources Corp. is seeking to set final prices on a $5 billion sale by the end of the week.

Speculative-grade energy companies pay an average yield of 5.78 percent on U.S. bonds, according to Bank of America Merrill Lynch data. Companies with ratings similar to Jupiter’s pay an average yield of 5.69 percent, according to Merrill Lynch data.

Bonds due in January 2023 sold by Houston-based Sanchez Energy Corp. were priced yesterday yielding 5.968 percent. Like Jupiter’s bonds, the debt was rated B3 by Moody’s Investors Service Inc. and B- by Standard & Poor’s.

Teine Energy Ltd. priced $350 million of notes due 2022, rated B3 by Moody’s, at a yield of 7 percent.

Transaction Close

The six-year rally in speculative-grade debt has been sputtering after investors withdrew $198 million from high-yield funds in the five days through Sept. 3, the first outflow in four weeks, according to data provider Lipper.

Charles Zehren, a spokesman at Rubenstein Associates Inc. who represents Apollo, declined to comment on prospective terms.

Jupiter, which postponed the bond sale Aug. 5, needs to have the funding in place in order to meet the end-of-quarter closing date, Paresh Chari, an analyst at Moody’s Investors Service, said by telephone from Toronto yesterday.

The ratings company estimates it will be more than a year before Jupiter starts earning cash and expects Jupiter to have negative free cash flow, or a loss, of $170 million in 2015.

“It’s a lot of debt for a natural-gas company,” Chari said. Moody’s rating of B3 is six steps below investment grade.

Stagnating fuel prices resulted in lines of credit being cut for smaller natural-gas producers in 2011 and 2012, which caused some companies to struggle to fund operations. Unlike borrowers with investment-grade ratings, speculative-grade producers need to pledge reserves for loans.

Falling Prices

Natural gas, which has declined 6.4 percent this year, has averaged $3.89 per million Btu over the past five years on the New York Mercantile Exchange. That’s lower than prices for the fuel in Europe or Asia and less than a third of the 2008 peak.

Canadian Prime Minister Stephen Harper’s vow in 2012 to block sales of oil-sands assets to state-owned firms after ceding Nexen Energy ULC to China’s Cnooc Ltd. helped push deal activity to the lowest in a decade in 2013, Bloomberg data show.

Takeovers in Canada’s energy industry have more than doubled this year to $22 billion, according to data compiled by Bloomberg, as private-equity firms from Apollo to KKR & Co. begin to buy up discounted assets.

Energy Banker

New York-based Apollo, which describes itself as “contrarian,” expects to boost production under the leadership of former investment banker Simon Bregazzi, who is Jupiter’s new chief executive officer. Bregazzi ran Canadian energy investment banking for Goldman Sachs Group Inc. before joining another Calgary gas company, Canbriam Energy Inc., where he was chief financial officer until this year.

“Right now, one of our favorite spots is in the energy sector,” Black said Aug. 6 in a conference call following the firm’s second-quarter results. Apollo is earmarking $2.2 billion for energy deals over the next 12 months, Black said.

“There’s a new management team, and they’re trying something a bit different on the engineering side,” Chari of Moody’s said. “We don’t think there’s a risk of downside to what Encana had, but we also don’t see the upside they think there will be.”

Jupiter Resources plans to explore and develop the Bighorn properties with liquids-rich natural gas, including butane and other higher-priced fuels that are produced along with the gas, according to the company’s website. Total net proved reserves at the end of 2013 were approximately 1.1 trillion cubic feet equivalent, about 75 percent of which is natural gas.

Production will rise to between 50,000 and 60,000 barrels a day in 2015, from 40,000 in 2014, Moody’s forecasts.

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