Notable Corporate Bonds Issued March 14, 2012

Includes: AIG, AL, ILFC, KYN, TYG, TYY
by: Rubicon Associates

The demand for corporate bonds continued unabated Wednesday, as eight issuers came to market with new issues totaling nearly $4.6 billion. With approximately $14 billion issued this week (in public markets), it does not look like we will see a repeat of last weeks $40 billion.

The following were the issues brought on March 14:

Two things I found notable in today's issuance: International Lease Finance Corp (NYSE:AIG) and Kayne Anderson MLP Investment Company (NYSE:KYN).

First, and more importantly, let us look at International Lease finance (ILFC).

ILFC is the world's largest independent aircraft lessor measured by number of owned aircraft. Their portfolio consists of over 1,000 owned or managed aircraft as well as commitments to purchase 257 new high-demand, fuel-efficient aircraft, including 25 through sale-leaseback transactions, and rights to purchase an additional 50 such aircraft.

Proceeds from this deal will be to repay all of the amounts outstanding under the Company's $750 million term loan due March 17, 2015, which is secured by 43 aircraft and all related equipment and leases. The company is unencumbering assets, which is necessary to improve their credit profile. Why is this necessary?

Recall that ILFC is a wholly owned subsidiary of American International Group and AIG's shares of ILFC's common stock were pledged to the US government as part of AIG's rescue package. That is changing as pursuant to a March 7, 2012 amendment to the Master Transaction Agreement and other related agreements, shares of ILFC's common stock will be released from the liens created under such agreements and, upon the satisfaction of certain conditions, will no longer constitute collateral securing the repayment of the liquidation preference of the preferred interests in the AIG special purpose vehicle established to hold AIG's ownership of ordinary shares of AIA Group Limited.

Bottom line from this: ILFC is not a core business of AIG's and the release of liens will help the company part ways with AIG (in my opinion). The marriage of AIG and ILFC was an economic one (similar to Aviation Capital's ownership by Pacific Life) - AIG got the tax benefits associated with leasing and ILFC got the funding benefits of a AAA rated company. AIG no longer requires the tax benefit and ILFC no longer gets the benefit of a parent with AAA ratings. End of story.

What is equally interesting is that Air Lease Corp (NYSE:AL) came to market yesterday with $1 billion of five year notes at 5.625% (deal was doubled due to demand). This is right about in the middle of ILFC's three and seven year rates (even though Air Lease is unrated and much smaller). What this tells me is that ILFC is still paying up for being part of the AIG family. As ILFC unencumbers assets it will increase its creditworthiness and hopefully get to full investment grade independent of AIG. Note also that ILFC has increased aircraft impairments, so they are cleaning up their balance sheet to get ready for a transition (in my opinion).

The other issue of note is Kayne Anderson MLP Investment Company issuance of $117 million in Series E Mandatory Redeemable Preferred Shares (redemption date of April 1, 2019 and monthly dividends). The company plans to use the proceeds to make investments in portfolio companies, to repay indebtedness, to purchase up to $10 million of the Series A Mandatory Redeemable Preferred Shares and for general corporate purposes.

Kayne is a non-diversified closed end management investment company whose stated investment objective is to obtain a high after-tax total return by investing at least 85% of their total assets in MLPs and other Midstream Energy Companies.

What intrigued me was that they were able to get this done at 4.25%, or 287bps above the 7 year treasury rate. Yes, they are AA rated, but these are preferred shares. They seem to be at market rates for similar investments though. Some comps:

  • Kayne Series D trades at 4.87% with a marginally negative yield to call.
  • Tortoise Energy Capital (NYSE:TYY) Series B trades at 4.875% with a negative yield to call.
  • Tortoise Energy Infrastructure (NYSE:TYG) Series A trades at 5.88% with a marginally negative yield to call and is longer dated.

It might be worthwhile investigating a swap out of TYY-B or KYN-D into the new KYN-E as there are similar yields and a positive yield to call.

The great thing about the current new issue market is that it is not sector focused. Deals from all walks of life are coming to market, which allows investors to pick their spots and achieve diversification and allocation goals.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.