Earlier this month, we published an article on (High Yield) Bonds – A Growing Trend in the European Energy Sector?, in which we highlighted a steady stream of high yield bond offerings by a diverse range of issuers across the European energy sector, including oil and natural gas companies, refiners, service / engineering companies as well as utilities / power companies.
Over the last week, two additional European oil and gas companies completed successful high yield bond offerings. Aker BP ASA (Moody’s: Ba1; S&P: BB+), the Norwegian oil and gas company with exploration, development and production activities exclusively on the Norwegian Continental Shelf, completed its offering of $500,000,000 5.875% Senior Notes due 2025, and Tullow Oil plc (Moody’s: B3; S&P: B), the independent oil and gas exploration and production company, with a diversified portfolio of assets primarily in sub-Saharan Africa and South America, completed an offering of its $800,000,000 7.000% Senior Notes due 2025.
Both issuers are established high yield bond issuers, and the proceeds of both notes offerings are being used to refinance existing indebtedness.
The notes offered by Aker BP ASA are “high yield lite”, which means that they do not contain a full, traditional high yield covenant package. Instead, they contain a covenant package that more closely resembles that of an investment-grade issuer, with only fairly weak limitations in connection with the incurrence of additional secured indebtedness and guarantees of restricted subsidiaries, a merger covenant and a weak change of control covenant. They do, however, contain call protection / optional redemption features typical for high yield bonds, which give the issuer significantly higher flexibility than the “make-whole for life” provisions customarily found in investment-grade bonds.
The notes offered by Tullow Oil plc do contain a full, traditional high yield covenant package, albeit with certain weaknesses / significant flexibility (depending on the relevant perspective), similar to the covenant package of its $650,000,000 6.25% senior notes due 2022, which will be redeemed with a portion of the proceeds from this latest offering. This latest point is likely reflective of a broader market trend as many issuers seek to extend the maturity profile of their debt and lock in fixed interest rates while they still remain near historic lows. The optional redemption features typical for high yield bonds allow high yield issuers to refinance existing bonds significantly in advance of their final maturity date, without incurring prohibitive prepayment expenses.