Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Blackstone has agreed to buy a joint venture stake in interstate pipelines from US energy group EQT in a complex financing manoeuvre that shows how some of the biggest corporations are turning to private capital giants to alleviate burdens on their balance sheets.
The $1.1tn investment manager’s fast-growing credit and insurance arm will finance the $3.5bn transaction, drawing largely on insurance capital, according to people familiar with the matter.
The deal puts Blackstone head-to-head with rivals including Apollo, as they push into corners of financial markets that have long been dominated by traditional banks and bond markets. Private capital groups are using novel financing structures to provide investment-grade companies with balance sheet relief, without taking control of critical assets.
EQT will contribute its stakes in natural gas pipelines and other assets to the joint venture while retaining majority ownership of the projects, which are forecast to generate average earnings of $750mn a year through 2029. About 60 per cent of the cash that is produced will go to pay the Blackstone funds invested in the venture, with EQT keeping the remainder once Blackstone hits an agreed target for returns, the people added.
Critically, because both EQT and Blackstone will each hold equity stakes in the joint venture, the financing will not be treated like debt by credit rating agencies.
The deal, like Apollo’s recent $11bn financing for an Intel chip manufacturing plant in Ireland, is crucial for EQT to maintain its investment-grade rating. The company is rated triple B minus or the equivalent by all three major US credit rating agencies, the lowest rung of the investment-grade universe.
Having its rating cut even a single notch would push EQT to junk status and could result in higher borrowing costs.
Companies including Boeing and Intel have sought to find creative ways to obtain fresh financing that preserves their investment-grade ratings, fearful that downgrades could cut them off from critical financing sources or make annual interest payment burdens more onerous.
Private investment groups including Blackstone, KKR and Apollo — which have moved far beyond their buyout roots — have subsequently stepped in.
The deals are often structured to provide the firms’ insurance clients with higher returns than similarly rated investment-grade bonds.
They rely on the contracted cash flows generated by businesses such as EQT’s pipelines, which are then sliced and diced into individual tranches that divide the risk of a shortfall in payments between different investors. The more senior portions of the deal are graded by credit rating agencies, and as a result, can be suitable investments for insurers.
Blackstone funds that specialise in riskier credit or equity will invest in the junior portion of the deal with EQT.
EQT, which completed its near-$14bn takeover of Equitrans Midstream earlier this year, has been looking to cut its debt load. Between the deal with Blackstone and other divestitures, EQT expects to end the year with $9bn of net debt.
Blackstone is expected to earn a return of 8 per cent over the life of the deal. While that is a higher cost of capital than some of the company’s existing debt — EQT’s bonds that mature in 2034 on Friday traded with a yield of 5.6 per cent — it is lower than the cost of issuing new equity.
EQT also has the option to buy back Blackstone’s stake in the joint venture in eight to 12 years.
https://www.ft.com/content/9487fa71-93d0-4861-b49d-42b154d8974c
