UK oil major BP raised $12bn of debt with equity-like features on Wednesday, taking advantage of hot corporate credit markets to fortify its balance sheet.
The deal marked the largest ever sale of so-called hybrid bonds, which place less of a strain on a company’s balance sheet because the principal never has to be repaid. The fundraising comes just days after BP said it would take a writedown of up to $17.5bn after cutting its forecasts of future energy prices.
The FTSE 100 company raised $5bn in US dollars, €4.75bn in euros and £1.25bn in sterling and locked in annual interest costs as low as 3.25 per cent on some of its new euro notes.
The issuance of hybrid bonds has been popular with corporate treasurers. Credit rating agencies do not treat the securities like traditional bonds and typically only count about half the value of the hybrid notes as debt. That approach often allows businesses to raise greater sums without straining their creditworthiness.
BP had never previously tapped the hybrid market and its debut demonstrated the heightened appeal of the debt even as the coronavirus crisis pressured its business.
“BP hasn’t issued hybrids in any market and now they’re hitting every market at once,” said Colm Rainey, director of debt capital markets at Citigroup. “A decently sized and priced hybrid can help the balance sheet when in the eye of the storm.”
BP said this week that it would slash the value of its oil and gas assets as executives expect the coronavirus pandemic to significantly depress energy demand and speed the shift to cleaner power sources. The company said the fundraising was done to “strengthen our financial framework”.
Prices of hybrid bonds had slumped earlier this year in the wider market sell-off, as investors dumped their holdings of riskier debt. But appetite has rebounded in recent weeks, with European companies including Repsol and Volkswagen using such instruments to refinance existing bonds.
The low rates on offer on hybrid debt have been part of the appeal for companies, as BP’s borrowing underlined. The decision to raise hybrid debt also allowed it to avoid an equity sale.
“Clearly given the difficulties in the industry recently [and] the lower oil price related to Covid-19, this is a really good way of enhancing their credit profile,” said Julian Marks, who manages a fund dedicated to investing in hybrid bonds at Neuberger Berman.
The oil major’s dollar-denominated debt priced with yields of 4.375 and 4.875 per cent in two tranches with an option for BP to repay investors in five and 10 years, respectively.