Bond refi ‘confirms’ IFM thesis on Colonial Pipeline

Industry Funds Management (IFM) has refinanced the debt on its minority stake in the Colonial Pipeline by issuing $250 million of 10-year bonds backed by the cash flowing from its interest in the large East Coast carrier of petroleum products.

“From our perspective, it really confirms our thesis on that asset,” Alec Montgomery, head of the firm’s US operations, said of the refinancing. “It’s a great infrastructure asset,” he added.

IFM bought its 15.8 percent stake in Colonial in 2007 for $651 million, which it financed with $426 million of equity and a $225 million, five-year loan. “We were looking at that loan maturing in the next 12 months and, given the markets and the low Treasury rates, we didn’t want to wait till the last minute,” Montgomery said. The bond refinancing closed 19 April, he noted.

The $250 million of bonds, which pay a 6.45 percent coupon, received BBB- ratings from S&P and Fitch, the lowest notch on the agencies’ ranking of investment-grade securities. Montgomery said the investment-grade offering was unique given that the issuer, a Colonial holding company owned by IFM, is a minority investor with “little control over the dividend policy, which is our sole source of liquidity to service that debt”.

“It’s fairly unique to get that 10-year bond for that minority holdco,” Montgomery said. He added that Colonial’s steady, predictable cashflows made rating agencies comfortable with IFM’s ability to service the debt. Colonial is the nation’s largest carrier of so-called “refined” petroleum products, like jet fuel and gasoline, making it an essential route for such fuels as they travel some 5,600 miles from refineries on the Gulf Coast to major markets on the Eastern seaboard, such as New York and New Jersey.

Since IFM’s purchase, other big-name infrastructure investors also have bought into the pipeline. In October, private equity firm Kohlberg Kravis Roberts closed a $1.1 billion deal to purchase a 23.4 percent interest in Colonial alongside the National Pension Service of Korea, a long-time limited partner in KKR’s private equity funds.

“It’s durable, predictable nature, coupled with attractive inflation-hedged cash yield, made it exactly the type of defensive asset we seek in infrastructure,” Raj Agrawal, a director on KKR’s infrastructure team, told Infrastructure Investor in a recent interview.

IFM’s Montgomery agrees: “We were ahead of the curve in realising the value of that asset to institutional investors.”