MARKET SIGNALS 08.11.2020
IDEA #1: Southwestern Energy Corporation
The dynamics of the yield on the index of high-yield American corporate bonds LF98TRUU, which is literally one step away from its dock levels (see the chart below), prompted us to pay attention to the Southwestern Energy Corporation (SWN) Eurobond due in 2026. Although in terms of price, this issue has already overcome the consequences of the current crisis, its ratio of risk and profitability, in our opinion, is still very interesting.
Southwestern Energy is a somewhat unusual company in the sense that, unlike most other global producers, its problems began much earlier this March. SWN is a natural gas producer in Texas (USA). It must be said that the "shale" revolution, global warming (the past winter became the warmest in the United States over the past 140 years), and, more recently, the slide of the US economy into recession led to a steady decline in natural gas prices. As a result, since 2017, SWN's exchange capitalization has decreased by 3 times.
Along with the downward pressure on the gas market, the current crisis has added problems to the company. So, for the first time in a long time, SWN's operating profit in Q2. quarter of 2020 went into the area of negative values (see chart below). The market expects the company's earnings to recover to last year's levels no earlier than 2021.
With all this, the issuer's credit profile remains fairly stable. Thus, with an annual interest payment of $ 80 million, the adjusted operating cash flow for the last 12 months amounted to $ 1,175 million as of June 30, 2020.
The first large payments of the debt are expected in 2025 (see chart below). the weighted average maturity of SWN's debt portfolio is 5 years. The issuer declares that it has open credit lines in the amount of $ 1.3 billion. Interestingly, despite all the perturbations with natural gas prices (which did not come to light yesterday), credit agencies are in no hurry to downgrade their ratings on Southwestern Energy. As a result, the issuer retains double B ratings from all the Big Three agencies.
Note that the probability of default of the company's Eurobonds maturing in 2026 during the remaining term to maturity, according to the Bloomberg default risk model, is only 4.9%. At the same time, the issue's credit spread (z-spread) reaches almost 800 bp. P.
The senior unsecured issue with maturity April 1, 2026 in the amount of $ 650 million was placed in September 2017 on the global market. The largest holder of the Eurobond, according to Bloomberg, is Blackrock (6.8%).
There are four call options on the security, the yield to the closest of them (04/01/2021 at a price of 105.625%) is 20%. There are no options for revising the coupon level (7.5% per annum). The coupon is paid twice a year: April 1 and October 1.
The face value and the minimum lot for the paper are respectively $ 1,000 and $ 2,000. The paper is serviced by NSD and is available only to qualified investors.
Alexey Shternshis
Joint Managing Director
Capital Pi
https://capitalpi.fund/market-signals-200811