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Athabasca seeks cheap money, may face push back

Athabasca oil sands digger, Albian Sands, Alberta, Canada.

Dieter Blum/Shell

Athabasca Oil Corp. is looking to set a record for a Canadian high yield bond sale Friday, and seeking to do it at a very attractive interest rate for the company.

According to people familiar with the transaction, the Alberta oil field developer is hoping to pay an interest rate in the 7 per cent range on $600-million of new five-year bonds, an aggressive target for an offering that would be the largest in Canadian history, but one that reflects the current hunger investors have for yielding assets. Even so, the company is likely to get push back from the market that a higher rate, closer to 7.5 per cent, is more appropriate given the risk in the transaction.

Athabasca is on a road show now seeking interest in the bonds, which has taken the company to Toronto, New York and Boston to pitch the transaction, and the final terms of the deal are expected to be set Friday.

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At 7 per cent, the deal does not price in much additional risk over and above the average high yield deal. The rate Athabasca is seeking compares with a yield of 6.7 per cent for the broader high yield market, measured by the Finra-Bloomberg High Yield Corporate Bond Index. Seven per cent is also roughly 5.7 percentage points over the 1.3 per cent yield for the benchmark Government of Canada five-year bond – which is roughly in line with broader high yield market spreads.

Investors will be lending money to a company that is not generating nearly enough cash to come up with $42-million or more in annual interest payments on the bonds. The company wants the money to solidify its cash position as it seeks to negotiate joint ventures and develop its properties, which stretch across Alberta's oil bearing lands.

"It is an OK deal if priced right," said Paul Tepsich, head of Toronto asset manager High Rock Capital Management. "This is an absolutely enormous land mass but if it can't be put into production, then it is hard for them to drive enough cash flow to pay the coupon. It is really project financing. The covenants look to be tight enough so at this stage, I think it is a matter of price."

The bonds are rated 'B', a few notches below investment grade. Investors will have the comfort of knowing that the bonds are second-lien, giving them a claim on assets, and there are plenty of ways for Athabasca to raise money, including asset sales. In a worst-case scenario, ratings agency Standard & Poor's estimates that investors would get at least 90 cents on the dollar back in a default situation.

Still, the fact remains that the company's current cash flow from operations is not even close to being enough at the moment to cover interest payments. The company has burned through $31-million of cash in the first nine months of this year in its operating activities.

Athabasca can use cash on hand to use to pay interest, and if it needs more money there are other mechanisms. The company has the ability to use a put-call arrangement to sell a stake in its Dover property to PetroChina, and it has the "ability to sell portions of its vast undeveloped acreage," Standard & Poor's said in its ratings opinion late Wednesday.

The bond is a bridge to carry the company over until money comes in from future joint ventures, and having the cash on hand and proven access to bond markets gives the company the ability to negotiate "from a position of strength," said Geof Marshall, who manages high yield funds at Signature Global Advisers in Toronto.

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"The market has to decide if the price talk and structure on the new bonds is sufficient to compensate for short-term negative cash flow and the risk these JVs do not materialize and Athabasca has to develop them on their own," Mr. Marshall said. "This risk is mitigated by management's track record, and ultimately by the value of the billions of barrels of bitumen in their acreage."

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