What Are Some Examples Of Alternative Financing Options Available To MLPs?

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Includes: ENLK, ETE, NGLS, PAA, SUN
by: Alerian

By Karyl Patredis

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What are some examples of alternative financing options available to MLPs?

15 years ago in a land far away, the younger and better-rested version of myself was trying to figure out how to bankroll her college education. Unfortunately, I didn't have a college fund, and there wasn't money in our household budget for the expense. It wasn't ideal, but I was determined to stay out all night at packed-out college bars and skip classes, and I wasn't going to let a little thing like financing stand in the way of my dreams.

In today's environment, many an MLP can identify with the young me. Much like I didn't have access to a college fund, many MLPs are finding themselves with limited access to traditional funding. To make their dreams come true (or to keep their businesses afloat), MLP executives are seeking alternative sources of financing.

To fund the best four years of my life at Texas A&M, I left no stone unturned. I had a handful of small scholarships, but the bulk of my funding came from: student loans, bank loans, and loans from close family. Today I'll discuss three alternative MLP financing options: institutional preferred offerings, retail preferred offerings, and PIPE offerings.

The money I received from student loans is most like [1] the money an MLP receives from an institutional preferred offering. Student loans are paid out by a large entity (such as Sallie Mae). There is a fixed interest rate on these loans, and with strings attached (example: you must be enrolled at least half-time in college, you must maintain satisfactory academic progress, etc.) With institutional preferred offerings, MLPs will work with a very small group of large investors [2] to issue preferred units. The terms of each preferred offering agreement vary significantly, but this class of investors is guaranteed a minimum return and preferred units are senior to common units in a liquidation scenario. Agreements might include other provisions, such as the possibility for dividends to be payable-in-kind for a period, for units to be convertible to common equity after a certain threshold has been reached, or to give the preferred class a board seat if the company fails to make payments as promised. Last month, EnLink Midstream Partners (NYSE:ENLK) privately negotiated a convertible preferred offering with Enfield Holdings for $750 million. The money raised in this offering will be primarily used to fund ENLK's acquisition of Tall Oak Midstream. This month, Plains All American (NYSE:PAA) entered into an agreement with seven institutions [3] to raise $1.5 billion in a private placement of 8% Perpetual Series A Convertible Preferred Units. The placement is expected to close this Thursday, January 28.

The small loans I received from banks can be compared to retail preferred offerings in that these loans came in smaller chunks from multiple parties. I didn't seek out a large lender like Sallie Mae, but shopped around at places like The Bank & Trust of Bryan-College Station and Brenham National Bank. In much the same way that my two types of loans (student and bank) were very similar, retail preferred offerings and institutional preferred offerings are also very much alike. The key difference between the two is where the money is coming from. Unlike with institutional preferred offerings, retail preferred offerings are open to anyone who wants to buy them (individuals, small money managers, etc.) and the MLP doesn't directly negotiate with each investor. In October of last year, Targa Resources Partners (NYSE:NGLS) issued 9.00% Series A Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units. Retail preferred units are typically listed on the same exchange as the MLP, but with a different ticker. The aforementioned units, for example, carry the ticker NGLS-A.

In order to fill in the gaps in my financial plan for school, my mom called close family to lovingly convince them I was worthy of a loan. My mom was sort of like my placement agent [4], seeking out potential sources of cash on my behalf. Private placement agents typically manage private investment in public equity (PIPE) offerings. The agent is responsible for reaching out to potential investors in order to find interested buyers for the units. PIPE offerings are non-registered offerings of equity and are typically made up of common units. These units are usually offered to investors at a discount and have lock-ups [5]. Sunoco LP (NYSE:SUN) completed a PIPE offering in mid-November of last year. A group of private investors (for $685.5 million) and Energy Transfer Equity (NYSE:ETE) (for $64.5 million) comprised the approximate $750 million of gross proceeds.

It's been said that "where there's a will there's a way." I know this saying certainly proved true for me when it came to going to college. And if you look at the strides some MLPs are making to continue growing during this downturn, it might be fair to say the saying holds for many midstream businesses too.

Footnotes:

[1] Please note that the various MLP financing methods discussed today won’t eventually be paid back in full and cease to exist. Unlike college loans, preferreds, if not converted, exist in perpetuity.

[2] Pension funds, mutual funds, money managers, etc.

[3] Affiliates of EnCap Investments, L.P., EnCap Flatrock Midstream, The Energy Minerals Group (“EMG”), Kayne Anderson Capital Advisors, L.P. (“KACALP”), First Reserve Advisors, L.L.C., Massachusetts Mutual Life Insurance Company and Kaiser Foundation Hospitals

[4] Except that she did not charge a fee.

[5] Lock-ups mean that whoever buys them can’t sell them for a certain period of time. The SUN offering had a 40-day lock-up, for example.

Disclosure: © Alerian 2014. All rights reserved. This material is reproduced with the prior consent of Alerian. It is provided as general information only and should not be taken as investment advice. Employees of Alerian are prohibited from owning individual MLPs. For more information on Alerian and to see our full disclaimer, visit http://www.alerian.com/disclaimers.

Karyl Patredis is the Logistics Coordinator at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Ms. Patredis leads the firm's ongoing efforts toward greater organizational efficiency. She also oversees Alerian's feedback process for creative output. Ms. Patredis graduated with a Master of Science in Accounting and a Master of Business Administration from the University of Dallas, as well as a Bachelor of Arts in Communication and a minor in Psychology from Texas A&M University.