Company That Sold a Record Muni Junk-Bond Is Back With an Even Bigger Dealby
$1.4 billion offering set for Texas methanol factory
While corporate junk bonds stumble, risky munis see gains
Two years after selling what was then the biggest junk bond in the history of the U.S. municipal-securities market, a Dutch chemical company is back again with an even larger deal to build a methanol plant near Texas’s Gulf Coast.
OCI N.V.’s Natgasoline LLC plans to issue $1.4 billion of debt through Texas’s Mission Economic Development Corp. as soon as next week to finish work on the facility in Beaumont, according to data compiled by Bloomberg. The company, run by Egyptian billionaire Nassef Sawiris, is no stranger to the state and local bond market: its Iowa Fertilizer Co. backed a $1.2 billion junk-bond sale in April 2013.
The deal may be the largest offering of speculative-grade municipal bonds since March 2014, when Puerto Rico sold $3.5 billion, and comes amid a rally in the securities as investors seek higher returns with yields holding near a half-century low. The plant would almost double U.S. production of methanol, a business dominated by overseas companies and dependent on a steady supply of low-cost natural gas.
“Methanol might be a little bit tougher of a market than fertilizer in the Midwest,” said John Miller, who runs Nuveen Asset Management’s $10.9 billion municipal high-yield fund, the largest of its kind. He said he may buy some of the bonds, anticipating the yields could exceed 10 percent on taxable securities. “The yield differential is going to be gigantic.”
Debt issued for companies through public agencies is among the riskiest in the municipal market because governments aren’t on the hook if the projects fail. As a result, they offer higher payouts than state or city debt.
Iowa Fertilizer bonds were sold for yields of as much as 5.3 percent, about 3 percentage points more than top-rated debt, Bloomberg data show. With the new deal, the chemical company may need to pay more than it did in Iowa because the methanol industry would be affected by a worldwide economic slowdown, said Miller, whose company owns $219 million of the fertilizer bonds.
Such returns may draw high-yield municipal money managers who have had few new deals to chose from as their funds pulled in $758 million over the past three weeks, the largest inflow since January, Lipper US Fund Flows data show. This year, just $1.7 billion of municipal debt came to market with a speculative grade from one of the three largest credit raters, a sliver of the $320 billion in sales, Bloomberg data show.
The imbalance has fueled a rally in the debt, with high-yield munis returning 4 percent since the end of June, according to Bank of America Merrill Lynch indexes. Those returns stand in contrast to the rout in corporate junk bonds, which have lost 2.2 percent during that time.
The project may be a hard sell with some municipal-bond investors who have little expertise with the chemical business. Jason Diefenthaler, who manages a high-yield fund at Wasmer Schroeder & Co. in Naples, Florida, said he’s steering clear.
“This is the kind of deal we usually strike off our list -- the reality is we’re more traditional municipal-bond investors and these types of deals are a bit unusual,” Diefenthaler said. “We don’t feel like we bring expertise in the methanol industry.”
Natgasoline’s 518-page offering document details 25 separate risks to bondholders, including its limited experience producing methanol, which is used in paints, plastics, furniture and car parts. The company is also counting on natural gas prices remaining below the 25-year average of $4 per million British thermal units through 2024.
The offering statement says Standard & Poor’s and Fitch Ratings will rate $1.2 billion of the taxable debt, though the grades have yet to be assigned. They’ll probably be ranked BB-, three steps below investment grade and the same as the Iowa Fertilizer bonds, said David Ambler, who analyzes high-yield munis at AllianceBernstein Holding LP in New York.
Hans Zayed and Omar Darwazah, spokesmen for OCI, didn’t respond to e-mails or voice messages seeking comment.
The company is seeking to capture a share of the 4.8 million tons of methanol that the U.S. imports annually. The Beaumont facility, expected to open in 2017, will have the capacity to produce 1.75 million tons per year, according to offering documents. That compares with 2 million tons generated in 2014 across the U.S.
“We’re seeing a sizeable increase in demand for methanol,” said Gregory Dolan, chief executive officer of the Methanol Institute in Alexandria, Virginia.
Beaumont, a city of 118,000 about 85 miles (137 kilometers) east of Houston, has one of the nation’s busiest ports. The plant will be “in the heart of the United States natural gas pipeline network,” according to offering documents.
OCI already has experience in the area. The company in 2011 acquired a methanol-production facility from Eastman Chemical Co. that’s two miles away from the new site, according to offering documents. It began producing the chemical in 2012.
OCI uses a case study of its Iowa Fertilizer plant as evidence that the bonds are a worthy investment. Of 13 nitrogen fertilizer projects that were announced across the country after 2010, only the Iowa facility received financing and is currently under construction, according to the report from Integer Research.
The bonds have also paid off: a $429 million portion of the debt maturing in 2025 last traded for an average of $1.08 on the dollar, a gain of 8.3 percent since they were first sold.