ET 0 11/01/2066

[thepupil]

I own a decent (~5%) position in the Energy Transfer Floaters which mature in 2066. I bought around $79/$80 and they're offered at $81.

 

CREDIT: the bonds are pretty much subordinate to all other bonds of ET, but above the prefs / common. ET has $48B of debt and trades for $100B enterprise value. 2024 EBITDA is $13.5B before a recent acquisition announce. So EV is about 7.5x EBITDA (which seems fairly reasonable, assuming no shenanigans, which I worry about w/ a roll-up) and the debt is about 1/2 that. I think these bonds will do very poorly if ET experiences a credit event. they are junior. But I don't foresee a credit event happening. More on that later...

 

Some VIC writeups

https://valueinvestorsclub.com/idea/ENERGY_TRANSFER_LP/1401237966#description

https://valueinvestorsclub.com/idea/ENERGY_TRANSFER_LP/7981359147

https://valueinvestorsclub.com/idea/ENERGY_TRANSFER_LP/2125697553

 

RATES: the bonds pay SOFR + 328 and the most recent coupon was set at 8.65%. This provides >10% of floating rate yield to the bonds at $80. The bonds are callable at par. The vast vast majority of ET's debt is fixed rate and features both coupons and yields below these bonds. I would expect that if short term rates persist or go even higher, then ET would have incentive to call the bonds using cheaper capital. They have a fair bit of near term maturities to work through but generally have been de-leveraging. Most recent acquisition announcement is all equity so leverage neutral. 

 

You can make a decent IRR here if the bonds are called. If the bonds aren't called, you'll earn the coupon / price paid over time. HEre's a simplified IRR / MOIC if called at 2,3,4,5 years (assuming an 8% coupon)

 

 

 

So what am i missing? I've done enough work to be somewhat comfortable with this bond. I'm willing to wager 5% of my nut on the idea that ET is worth > $50B (vs current $100B EV) and don't mind getting paid 10% in carry or making 25% upside if they decide to call the bonds. If rates fall, these will be less interesting in terms of coupon, but I make money elsewhere. I'm skeptical of roll-ups, but this seems like one that actually makes sense...

 

Any thoughts appreciated. 

 

 

 

Here are ET's Junior Securities

 

Here is a sampling of ET's unsecureds

Edited August 17, 2023 by thepupil

[zzzyx]

Nothing really to add...concur with your thoughts.  Have a sub-1% position here in several accounts....some of it purchased back in '20 in the low 50's.  Most recent purchase was at $77.

[lnofeisone]

I don't think you are missing a lot. In my opinion, the odds of these getting picked up early are lowish (I'd say 40%). ET is looking at it from the other side and sees what it would cost if they buy them. Not really worth it.

 

Also, CEQP's acquisition adds a bit of debt, but it's not due until 2026. CEQP does have a preferred with a nasty provision in it and I can see ET wanting to take that out first. Couple that with their own near-term maturities, they will be busy and I can see they forgo purchasing these. 

[thepupil]

ET is out today with a 3 part bond offering. They are issuing a 10 year and 30 year unsecured BBB notes (at or below 10Y + 190, probably sub 6%, and 30y + 212, which looks like should be 6.3% ish). They're also issuing junior subordinated notes whose rate resets on some interval at ~8.5%.

 

Use of proceeds is to redeem preferreds with high coupons. these prefs were trading above par and this was priced in the market. I believe gets rid of almost all debt which has a higher coupon and is junior to the bonds discussed in this thread. It also shows ET flexing its new investment grade rating to lower its cost of capital. 

 

After this, they'll have ~$45B of unsecured IG rated debt yielding 5-6.5% and then ~$5.5B of junior yielding 8.5 -10%+. Of the junior debt there will be a $950mm issue w/ a 9.7% coupon (which they should takeout before the bonds i like) and then after that is our $550mm of bonds with an 8.6% coupon (at current rates). 

 

The bonds are now $85 / $86. I still think they're attractive. 

 

you'll make ~16% cumulative from the call, plus you get SOFR + 330 (currently 8.6%) until call, so still a 10% current yield + the call potential. So still think a low to potentially high teens IRR on a 2-5 year time horizon with a call, with potential for sooner as they continued to clean up the capital structure. 

 

I also value these from a portfolio perspective as they will pay more coupon if the fed doesn't cut. if the fed doesn't cut, my longer term bonds will (probably) not do well. 

 

 

 

 

Quote

Energy Transfer LP (NYSE: ET) today announced its intention, subject to market and other conditions, to concurrently offer senior notes due 2034 and senior notes due 2054 (together, the “senior notes”) and fixed-to-fixed reset rate junior subordinated notes due 2054 (the “junior subordinated notes”) in separate registered public offerings. Energy Transfer intends to use the net proceeds from the concurrent offerings to refinance existing indebtedness, including borrowings under its revolving credit facility, to redeem all of its outstanding Series C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (the “Series C preferred units”), Series D Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (the “Series D preferred units”) and, when redeemable on May 15, 2024, Series E Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (the “Series E preferred units” and, together with the Series C preferred units and the Series D preferred units, the “select preferred units”), and for general partnership purposes.

 

On 8/17/2023 at 10:39 AM, thepupil said:

Here are ET's Junior Securities

 

 

Edited January 10 by thepupil

[thepupil]

Sold 1/2 for $90.1, some lots purchased in May 2023 @ $75, others in August 2023 closer to $80, all in cost of $78. decent returnfor risk taken (think like 20% ish total return since August, 30% ish from may, higher IRR's, beat SPY, JNK, BND, etc). 

 

Think the bonds are perfectly fine at today's price, but looking to add to other stuff/maybe some new ideas/longer term stuff. the callability means it's very easy to calculate your max upside. 

 

EDIT: I ended up selling the rest a few days later. just think I'll have better opps.

Edited February 15 by thepupil