Enbridge Berthold facility in North Dakota where the company loads crude oil on to trains from its pipeline.Jerry W. Kram/The Globe and Mail
Enbridge Inc. bondholders are the latest to lose ground as Canadian companies relent to shareholder demands to increase spending and payouts.
Enbridge's decision yesterday to transfer assets into an affiliate and boost dividends pushed down the price of the company's C$450 million ($395 million) of notes due June 2023, driving relative yields to a 14-month high of 149 basis points. Moody's Investors Service and Standard & Poor's changed their outlooks on the debt to negative, citing concern the changes will weaken the financial outlook of Canada's largest pipeline operator. Even so, shares of Enbridge rose 5.6 percent, the most in almost three decades.
"The equity holders have completely different interests," said Mark Wisniewski, portfolio manager at Toronto-based Davis Rea Ltd., which oversees C$650 million in assets. "They want companies to go out and spend all sorts of money. 'Let's do a deal,' that's what driving investment right now."
From coffee chain Tim Hortons Inc. to drugmaker Valeant Pharmaceuticals International Inc., companies have forsaken bondholders to fund growth and dividends. Taking out debt to snap up rivals or pay dividends often pushes up leverage, putting creditworthiness and bondholders at risk. Speculation that TransCanada Corp. will follow suit sent its shares as much 5 percent higher.
Credit Risk
In Enbridge's case, the company is moving C$17 billion of Canadian liquids pipelines to the Enbridge Income Fund to help pay for capital investment which will allow it to boost its dividend 33 percent. Moving cash-producing assets further away from holding units that pay bondholders dilutes their claim to cash flows, making them more subordinate.
"Investors no longer have direct access to those cash flows; they've been ringfenced into a trust, and that could lead to a downgrade," David Lund, senior credit analyst at Thrivent Financial for Lutherans, which holds bonds of both Enbridge and TransCanada, said by phone from Minneapolis.
The move reverberated through the Canadian corporate bond markets where Enbridge, with C$17 billion of bonds outstanding, was the biggest corporate debt issuer this year, according to data compiled by Bloomberg.
Enbridge Chief Executive Officer Al Monaco said he isn't ignoring bondholders.
"The credit metrics stay strong after this," Monaco said in an interview with Business News Network yesterday. "We looked at this from the perspective of all stakeholders."
Special Partnership
Monaco also cited an exchange offer that would allow bondholders to convert some of their holdings into obligations of Enbridge Income Fund. The offer is for bondholders "who may have a desire to hold their notes closer to the Canadian Liquids Pipelines businesses," according to a company statement Dec. 3.
Moody's changed its outlook on Enbridge Inc.'s Baa1 rating on Dec. 3 to negative citing "uncertainty surrounding the restructuring plans and the prospects for increased structural subordination."
S&P cited "a potential for financial metrics to weaken further due to the additional dividend expense," and the asset dropdown that could push Enbridge debt into a subordinate position. S&P rates Enbridge one step higher than Moody's at A-.
TransCanada has been fielding calls from an activist shareholder to speed up the transfer of U.S. assets to a tax- advantaged partnership and spin out its power business. Chief Executive Officer Russ Girling said at TransCanada's annual investor meeting Nov. 19 that the company plans to double its dividend growth rate through 2017.
"TransCanada is in the same boat," said Wisniewski of Davis Rea. "Activist shareholders are like the bond investors' worst enemy right now. Every time you buy a bond what goes through your head is, will it be vulnerable to financial engineering or a takeover? It's something you learn to live with."