Dollar High Grade Corporate: Cenovus Energy

Issuer: Cenovus Energy
Size: $3.5 billion
Issue date: Sept 15, 2009
Ratings: Baa2/BBB+ (Moody’s, S&P)
Maturity: Sept 15, 2014, Oct 15, 2019, Nov 15, 2039
Coupon: 4.5% (5yr, 212bp over UST), 5.7% (10yr, T+225bp), 6.75% (30yr, T+250bp)

Bookrunners: Barclays Capital, Bank of America Merrill Lynch, RBC Capital Markets

Having first announced in May 2008 plans to split into two distinct entities, Canadian energy company EnCana was finally able to confirm the restructuring in September 2009. The split would see the creation of EnCana (GasCo), which would focus purely on natural gas, and Cenovus Energy, an integrated oil company.

Almost as soon as the move was declared, but several weeks before it would be ratified by shareholders, Cenovus announced it would tap the bond market. With the credit rally in full swing during the late summer, the company saw an opportunity to establish a permanent capital structure with debt at historically attractive rates.

Stepping up to the plate

“We met with the company in early 2009 and floated the idea: can you form Cenovus as a subsidiary within EnCana and raise debt at that entity in advance of the split occurring? Once the split occurred, the debt would move with the new entity, meaning Cenovus would have a permanent capital structure and wouldn’t have to fund via a bridge facility to make that happen,” says Paul Bjorneby, a managing director in the debt capital markets at Barclays Capital.

Even allowing for the buoyant credit market in September, there are limits to what investors will buy, and several structural safeguards were included to allay their concerns. Proceeds from the deal would be put into escrow until the split was official, so neither EnCana nor Cenovus had access to the money. A special redemption feature was also included to protect bondholders if the event didn’t occur, meaning they would be paid 101% of the par value of the bonds. There was also a rating agency coupon step-up clause. Although the agencies had given Cenovus provisional ratings, the company technically owned no assets and was still a subsidiary of EnCana at that time. Consequently, if the ratings were lowered following the divide, investors would be compensated with a higher coupon.

It was also issued under rule 144A initially, because Cenovus was not making public filings at the time. To mitigate the perceived liquidity risk associated with private placements, a registration rights agreement was featured, requiring the company to register the bonds with the Securities and Exchange Commission in 2010.

With those safeguards in place, the company focused on what cost of funding was achievable. Bjorneby says the best comparables were Canadian rivals, Suncor and Husky Energy, both with 10-year benchmarks. In mid-September, Suncor bonds were trading between 215-225 basis points over US Treasuries, and Husky’s at 205bp. While some new-issue premium might have been expected given the unusual circumstances surrounding this trade, the five-year notes finished at 212.5bp, the tight end of initial guidance, while the 10-year and 30-year tranches ended at 225bp and 250bp respectively.

After the divide

Since consummation of the split on November 25, the secondary performance has been impressive, with the five-year bonds quoted close to 140bp, the 10-year bonds at 160bp and the 30-year notes at 170bp.

“The transaction exceeded our expectations,” says Ivor Ruste, chief financial officer at Cenovus. “While we have seen spreads tighten since, we attribute that to overall market conditions. We also recognise that if investors on our inaugural issue had a positive experience, we are likely to be better positioned for future offerings, developing lasting relationships with them.”