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Credit Insights

Complacency Continues to Broaden

With volatility at multi-year-low levels and plenty of liquidity looking for a home, any day with positive news allows asset prices to levitate.

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After 10 straight days of gains, the equity market's winning streak finally came to an end Friday as the S&P 500 dipped modestly. The equity market's risk-on sentiment seems to be that so long as the Federal Reserve is injecting $85 billion of debt into the financial system every month, equities have nowhere to go but up. However, the corporate bond market seems more suspicious of this supposition, as corporate bonds have not participated in this rally to nearly the same degree. The average credit spread in the Morningstar Corporate Bond Index tightened only 1 basis point last week to +134 and has tightened only 3 basis points over the past two weeks. 

Financials led the tightening last week as spreads with the sector contracted 2 basis points while the industrial sector was stagnant. Since the beginning of the year, our index has traded within a narrow 5-basis-point range; on a monthly basis in 2012, the index on average traded within a 15-basis-point range. Year to date, the Morningstar Corporate Bond Index has declined 0.63% as the 10-year Treasury bond has backed up 25 basis points to 2.00%, outweighing the additional return from corporate credit spread tightening.

With the VIX reaching 11.5, its lowest level since January 2007, complacency has reached new highs. With plenty of liquidity sloshing around looking for a home, any day with positive news--or even a day with a lack of news--allows asset prices to levitate. It has taken decidedly negative news to derail the seemingly impervious markets, and even then, the markets have quickly brushed off the news and quickly regained lost ground. The extraordinary level of global central bank easing appears unlikely to end anytime soon, especially with weakness experienced in emerging markets, eurozone economies in recession, and real GDP growth expectations in the United States in a moderate 2.0-2.5% range.

We view the corporate bond market as fully valued at current spread levels and expect that returns will be in the low- to mid-single-digit range this year. To generate a higher return, one would have to assume that either interest rates will fall below their already-low levels, or credit spreads will tighten toward the historically tight levels experienced before the 2008-09 credit crisis, neither of which we think will happen. In the runup to the 2008-09 credit crisis, an overabundance of structured credit vehicles such as collateralized debt obligations and structured investment vehicles were created to slice and dice credit risk into numerous tranches, which artificially pushed credit spreads too low. Once the credit crisis emerged, investors found that many of these vehicles did not perform as advertised. We doubt that these structures will reappear anytime soon. With real interest rates at negative real yields for the next five years, investors would have to be willing to lock in an even greater erosion of purchasing power to drive interest rates lower. We don't expect such an outcome.

European Sovereign Credit and Banking Fears Fading, but We Think Risk Is Still There
The yield on Spanish 10-year bonds rose 16 basis points last week to 4.92%, but are still 30 basis points lower than last month and near their lowest since late 2010. The yield on Italian 10-year bonds held steady at 4.60%, near the middle of its six-month trading range. While the markets appear sanguine regarding Europe's sovereign risks, we have long held a skeptical view that Europe's structural problems have been resolved. The rating agencies also appear to be increasingly nervous about the direction of credit risk among European nations. For example, Fitch recently cut its credit rating on Italy one notch to BBB+ and Moody's downgraded the United Kingdom to Aa1 from Aaa. Fitch specifically pointed to the adverse impact on the headline budget deficit due to Italy's deep, ongoing recession. While these downgrades are not significant events in and of themselves, they may indicate that the agencies are re-evaluating their credit ratings across the eurozone. The greater risk is if this foreshadows further rating changes in other European sovereign credit ratings. Also, as we've seen before, once one of the rating agencies makes its move, it provides cover for the others to follow.

Compounding the risk of for further sovereign rating downgrades, we think the continuing growth in nonperforming loans in Spain and Italy will most likely lead the markets to further question the stability of many European banks. For example, last week, Jim Leonard, CFA, our bank credit analyst, wrote that  Intesa Sanpaolo (ISP) (BB-) recognized an 18% year-over-year increase in gross total nonperforming loans in the fourth quarter. That brought Intesa's balance of gross nonperforming loans/total loans to well over 11%. Intesa points out, however, that compared with its Italian bank peers it has the second-lowest percentage, with the average percentage for Italian banks being 15.8%. These numbers are staggering, and they demonstrate how much Italy's economic slowdown has affected Italian bank loan portfolios. On its earnings call, Intesa included a slide that shows that at the end of 2011, Italian banks reported the balance of nonperforming loans/total loans at 9.9%, compared with 8.5% for Spanish banks. Intesa then stated that if Spanish banks had to report nonperforming loans in the same manner as required by Italian banking standards, Spanish bank nonperforming loans would jump to 25.3%. While we agree that this example does demonstrate the strict standards of Italian banking, we think it even further demonstrates the dire state of the Spanish economy. We continue to take a harsh credit view on the outlook for the Italian and Spanish banks, and our average credit rating is more than two notches below the rating agencies.

Click to see our summary of recent movements among credit risk indicators.

New Issue Notes

Our Favorite Nordic Bank Looks to Issue 3- and 5-Year Notes Today (March 15)
Svenska Handelsbanken (SHB A) (A+, narrow moat) announced Friday that it plans to issue new 3-year floating-rate and 5-year fixed-rate dollar-denominated notes. No information has been given yet on price guidance. This deal comes on the heels of Wednesday's 5-year deal from Skandinaviska Enskilda Banken (SEB A) (A, no moat), another Nordic bank. That deal priced at a spread of 100 basis points, which we still think is attractive. Given that we rate Svenska Handelsbanken one notch higher and we love its conservative profile, we would recommend these bonds all the way down to a spread of 70 basis points.

From a credit perspective, we are very comfortable with Svenska Handelsbanken. It is one of Sweden's largest banks, with operations in four other countries. It has more than 460 branches and assets of more than SEK 2.4 trillion. The bank's main market is Sweden, in which it's part of a four-party oligopoly. Handelsbanken has a history of maintaining a conservative credit underwriting profile and, unlike peers, tends not to chase growth. The result is a very low-risk loan book with minimal credit costs (the loan loss/loan ratio typically stays below 0.20%). Even in the early 1990s, when all Swedish banks were overwhelmed by a severe crisis, Handelsbanken was the only major institution that sidestepped the wreckage. Its credit costs usually trend 20-30 basis points below those of its rivals, a major competitive advantage, in our view. Handelsbanken also maintains a very conservative capital structure, as its core Tier 1 ratio is above 18% and its Tier 1 ratio is above 21% on a Basel II basis.

We Expect a Fair New Debt Issuance from Glaxo (March 13)
 GlaxoSmithKline (GSK) (AA-, wide moat) is in the market today with 3-year floating-rate notes, 3-year fixed-rate notes, 10-year notes, and 30-year notes. The proceeds will be used for general corporate purposes, including refinancing existing debt and boosting cashlike resources. In general, Glaxo possesses one of the weakest credit profiles of its Big Pharma peers with relatively high leverage (debt/EBITDA around 2 times) and relatively low coverage metrics (EBITDA/interest expense around 10 times). While its relatively high leverage and big dividend payout ratio (around 60% of net income) constrict its financial flexibility, we are pleased that GlaxoSmithKline has largely passed its patent cliff and its pipeline looks the best it has in more than a decade, which has helped stabilize the company's moat trend.

Overall, we think the market fairly values Glaxo's credit risks in existing notes, and we expect similarly fair pricing of its new notes. Its previous on-the-run issues in U.S. dollars were recently indicated as follows: 2015s at 28 basis points over Treasuries, 2017s at 48 basis points over Treasuries, and 2022s at 83 basis points over Treasuries. Based on that credit curve and last week's pricing of  Allergan's (AGN) (AA-, wide moat) new 5-year and 10-year notes at 55 and 85 basis points over Treasuries, respectively, we believe fair value on Glaxo's new 3-year, 10-year, and 30-year fixed-rate notes would be around 40, 85, and 105 basis points over Treasuries, respectively. Initial price talk appears slightly wider than our fair value estimates at this time, and we would be buyers of Glaxo's notes down to our fair value assessments of each tranche.

Skandinaviska Enskilda Banken: New Issue Talk Is Cheap for This Nordic Bank (March 13)
Skandinaviska Enskilda Banken announced Wednesday that it plans to issue new 5-year dollar-denominated notes. Initial price talk is a spread in the area of 105-110 basis points above the Treasury curve. This appears cheap to us, especially compared with similar-rated U.S regional banks. At the 5-year point,  PNC Financial Services Group (PNC) (A-, narrow moat) and  BB&T (BBT) (A-, narrow moat) trade in the area of 65-70 basis points above the Treasury curve, for a one-notch lower rating. While we acknowledge that SEB should trade wider due to exposure to Europe, we think the Nordic banks are somewhat insulated from the problems of Europe and we would recommend these bonds all the way down to a spread of 80 basis points.

SEB is one of the largest banks in Sweden, with a sizable merchant banking business that spans several countries in Northern Europe. It has more than 600 branches and about SEK 2.5 trillion in assets. SEB is a financial supermarket that can offer almost any financial product to its clients. SEB benefits from its dominant position in its main market of Sweden (more than 60% of profits), where it's part of a four-party oligopoly. More than half of SEB's profits come from providing corporate banking, investment banking, trading, and other capital markets-related services to large corporations in Nordic countries. SEB, however, suffers from poor efficiency, as operating expenses and funding costs constantly trend above some peers. SEB maintains very strong regulatory capital levels as its core Tier 1 ratio is above 15% (Basel 2.5 basis) and its common equity Tier 1 ratio (Basel III basis) is above 13%. Like many European banks, however, its actual capital levels are much lower as its tangible common equity/tangible assets ratio is closer to 3.5%.

We Would Pass on Salesforce.com's Convertible Issue (March 12)
 
Salesforce.com (CRM) (A) is looking to cash in on its rich equity valuation. We wouldn't play along. The firm is looking to issue $1 billion of convertible notes due in 2018, with an overallotment of up to $150 million. We are hearing that the notes will carry a minimal coupon (0.0%-0.25%) and a conversion price set at roughly a 50% premium to current trading levels. While Salesforce has performed extremely well of late, we believe its shares are already significantly overvalued: The stock trades at a 50% premium to our $120 fair value estimate. We expect that  Oracle (ORCL) (AA) and  SAP (SAP) (A+) will become stronger competitors in the online market for customer relationship management software. Both of these rivals have large traditional software customer bases to defend and we expect they will increasingly take market share as their as their cloud CRM offerings mature. We believe that Salesforce's CRM revenue growth will slow as a result.

A slowdown in CRM growth will pressure the firm to expand its non-CRM businesses, which will probably require additional acquisitions. Salesforce has spent heavily on acquisitions over the past three years, consuming $1.4 billion in cash. These deals are contributing relatively little to revenue today and are probably unprofitable in aggregate. The firm is investing to expand its presence in the social marketing business and build platform-as-a-service technology. We expect competition in these areas will be intense. For example,  Microsoft's (MSFT) (AAA) Azure platform benefits from its deep financial and technical resources and a much larger base of third-party partners.

We are skeptical that Salesforce's growth potential, while large, justifies a stock price that sits at nearly 9 times sales. The downside in the firm's proposed convertible note is significantly less than in the common stock. We would expect Salesforce's 5-year notes to trade at a spread of around 150 basis points to Treasuries. This view is based on our credit rating, which reflects the firm's solid cash flow and generally conservative balance sheet management, and spreads on similarly rated software firms. For example,  Intuit's (INTU) (A) 5.75% notes due in 2017 were recently indicated at a spread of about 145 basis points. Assuming no value in the convertible option, this spread equates to a $90 price on the new Salesforce convertible, assuming a 0.25% coupon. However, we believe the odds of realizing this downside are considerably greater than that of seeing significant upside from here. Based on this view, we wouldn't accept a minimal coupon in exchange for a large conversion premium.

Western Refining to Issue $350 Million of Senior Notes; Fair Value at 6% (March 12)
 Western Refining (WNR) (B+), which we do not award an economic moat, announced late Monday that it plans to issue $350 million of senior notes due 2021. We view fair value around 6.00%. This new 8-year debt will be noncallable for 4 years. Western intends to use the proceeds from this offering to fund its tender offer for all $325 million of the company's outstanding 11.25% senior secured notes due 2017. The 2017 notes become callable in June of this year at a price of 105.625% of par.

Western's fourth-quarter earnings report showed record results in what is typically a seasonally weak quarter. Companywide refining gross margins excluding hedging activities were $30.75 per barrel compared with $20.54/bbl a year before. For the full year, gross margins excluding hedging activities were $28.40/bbl compared with $23.83/bbl in 2011. The company continued to benefit from its two refineries' proximity to the Permian Basin and access to associated discounted Mid-Continent crudes. As a result, we expect the company to continue to benefit as long as the inland crude spreads remain wide. Credit metrics were roughly unchanged from the third quarter, as last-12-months leverage was 0.5 times compared with 0.4 times in the third quarter. Interest coverage remains high at 12.3 times. Western's cash balance was over $450 million as of Dec. 31, despite paying a special dividend of close to $100 million in the fourth quarter. As of year-end, total debt was $500 million, which represents a reduction in total debt of approximately $300 million from year-end 2011. Over our forecast period, we project that leverage will remain below 0.7 times and interest coverage above 7.5 times despite our assumptions that inland crude spreads decline in the out years.

 Tesoro (TSO) (BB), which we also do not award an economic moat, is a fair comparable for Western despite its larger size. Tesoro has 665,000 barrels per day of refining capacity spread across seven refineries, while Western has 151,000 barrels per day of capacity from its two refineries. Given the event risk inherent in operating refineries, diversifying risk across more facilities improves a company's credit profile, supporting the difference in our credit ratings despite Western and Tesoro having roughly equivalent credit metrics. Tesoro's 5.375% notes due 2022 recently traded at a yield to worst of 4.69%. Although Tesoro's yield is wide to the Merrill Lynch BB Index, we believe it is close to fair value as Tesoro will add $1.5 billion of debt in 2013 to finance its acquisition of BP's Carson refinery. For reference, the Merrill Lynch BB Index currently stands at a YTW of 4.29%, while the Merrill Lynch B Index stands at a YTW of 5.59%. We believe a 125-basis-point premium to Tesoro is appropriate for Western to account for Tesoro's increasing diversification through the Carson acquisition relative to Western's concentrated operations and our two-notch rating differential. Thus we believe that fair value for Western's new issue is 6.00%. While a slight discount to the Merrill Lynch B index despite Western's higher rating, we believe a 6.00% fair value captures Western's risk of operating only two refineries, its recent shareholder-friendly actions, and our long-term outlook for refining margins. 

Initial Talk on Discovery's New Issues Is Too Rich (March 12)
As we highlighted less than a month ago,  Discovery Communications (DISCK) (DISCA) (BBB) is issuing $1 billion in new 10- and 30-year debt as earnings have grown and management has expressed the desire to maintain leverage between 2.5 times and 3.0 times. (It stood at 2.5 times at year end 2012.)

Initial price talk was 145 and 180 basis points over Treasuries for the 10- and 30-year notes, respectively, and subsequently tightened to +135 and +170, respectively. In our view, this is too rich as the 10-year is 44 basis points inside the spread of the Morningstar BBB Industrials Index. It is also roughly the same as yesterday's initial price talk on two-notch-higher-rated  Viacom's (VIAB) (A-) new 10- and 30-year notes. They priced at +130 and +165 basis points for 10- and 30-year paper, respectively. We would rather give up some spread and own Viacom's bonds, as management's leverage target is more conservative at 2 times, where leverage is at present. We had opined yesterday that we would put fair value for Viacom's 10-year notes around +112.

We would view fair value for Discovery's 10-year bonds around 155 to 160 basis points over Treasuries, to account for the two-notch-weaker rating relative to Viacom. While similar-rated entertainment peer  CBS (CBS) (BBB) has 2022 notes that trade at 149 basis points over Treasuries, we have long since opined that CBS trades rich to the rating. We would view fair value for CBS in the same range as Discovery.

From a credit perspective, Morningstar does like Discovery's narrow moat, moderate credit metrics, and healthy cash flow generation, which is due to very modest capital expenditure needs. We are, however, concerned about management's willingness to return cash to shareholders to maintain leverage in the 2.5-3.0 times range.

Attractive Business Profile Aside, Steel Dynamics' New Bonds May Price Fair (March 12)
 
Steel Dynamics (STLD) (BB+) is issuing a 10-year $400 million bond that's callable in 5 years. It plans to retire the $500 million 6.75% senior notes due 2015 with the proceeds for a total consideration slightly above par. Steel Dynamics priced a similar $350 million 10-year (noncall 5) bond last August at 6.375%, and this is now indicated at a yield of 5.25%. We view this as generally fairly valued and would expect the new bonds to price at a similar yield.

We have always liked the firm's operating profile--its fleet of electric arc furnaces and incoming iron ore project form a solid base of our narrow economic moat rating. We recently upgraded the company's credit rating to BB+, as its low-cost advantage is gradually materializing after a few years of heavy capital investments. On the other hand, Steel Dynamics' management team has a lot on its plate for further enhancing its sustainable competitive advantages, which translates into continuous cash outflows that will keep the company's credit profile stable rather than improving. We do not see any near-term momentum for the company to become an investment-grade credit.

Bonds in the steel sector trade wide compared with the index, compensating bondholders for the notoriously cyclical nature of the business, and we expect the new Steel Dynamics bond to fall in a similar category. The Merrill Lynch BB index currently indicates a yield to worst of about 4.3% and an option-adjusted spread of 334 basis points over Treasuries. Although we like the fundamentals of Steel Dynamics compared with  Commercial Metals (CMC) (BB+) and much larger
 ArcelorMittal (MT) (BBB-), we think the existing bonds are priced fair to its underlining credit quality and the fact that steel companies have yet to see their businesses flourish in the current economic conditions. Steel Dynamics' 2022 issue is now indicated at a spread of +400 basis points and a yield of 5.24% to the next call date of Aug. 15, 2017. This is roughly in line with Commercial Metals' bonds (the 2018 maturity bonds have a yield of 5.1% and a spread to maturity of +417 basis points). ArcelorMittal, on the other hand, has a 2022 maturity bond that trade at about 5.25% and provide a spread to maturity of +340 basis points. If the new Steel Dynamics' bond were to price near 5%-5.5%, similar to where the existing bonds are traded, we think it is justifiable for this credit, but may not leave much on the table for long-term bond investors.

Viacom's New Issue Looks Attractive (March 11)
Viacom is coming to market with $500 million in 10- and 30-year notes split in two equal tranches. Initial price talk looks attractive to us at 145 and 175 basis points over Treasuries for the 10- and 30-year notes, respectively. This talk compares to indicated levels of 133 and 172 basis points over Treasuries for Viacom's notes due 2022 and 2042, respectively. Although we may see the new notes launched at tighter levels than initial price talk, Viacom's new issue looks interesting to us on an absolute and relative basis. The 10-year initial price talk is well wide of Morningstar's 10-year Industrials A- index, which is 112 basis points over Treasuries, but it is also wide of where media entertainment peer  Time Warner (TWX) (BBB+) trades. Time Warner, which we rate one notch lower, trades inside of Viacom with its 10- and 30-year notes at 127 and 165 basis points over Treasuries, respectively. Viacom should trade inside of Time Warner, in our view, as it has much better credit metrics. Viacom's leverage is under 2 times, while Time Warner's is approaching 3 times, and interest coverage is around 10 times, roughly double that of Time Warner. We view Viacom management's approach to the balance sheet as more conservative, given that its leverage target is 2 times, while Time Warner's is 2.5 times net of cash. We would view fair value for Viacom's 10-year notes around Morningstar's A- index of +112. Time Warner trades around 15 basis points tight of its respective index, but we believe its bonds are overvalued.

The key concerns about Viacom as a credit investment are the business' inherent cyclicality and management's record. The firm's cable network revenue mix is roughly 60% ads and 40% fees, which skews high on advertising relative to its peers. Therefore, we think the firm is more vulnerable to an advertising slowdown or decline in audience ratings. When evaluating management, we base our judgment on chairman Sumner Redstone, and his record raises questions. He used debt to build his media empire, which used to include Viacom and CBS as a single entity.

Still, Viacom is a solid company with strong margins that support its ability to turn around 20% of revenue into free cash flow. The firm's portfolio of cable networks captures roughly 20% of the viewership on basic cable, according to the company. We view Nickelodeon as the crown jewel of its portfolio, given the limited competition for its audience, and we estimate it generates about a third of Viacom's cash flow. Nickelodeon not only draws the largest audience for kids (ages 2-11), but it also has been the number-one-rated basic cable network for more than a decade. This attractive asset, coupled with management's leverage target that it has adhered to for the past three years, give us comfort from a credit perspective.

Nissan Motor Acceptance to Issue 3-Year and 5-Year Bonds; Price Talk Looks Fair (March 11)
 
Nissan Motor (NSANY) (BBB+) subsidiary Nissan Motor Acceptance is in the market with an offering of $500 million of 3- and 5-year notes. We view the finance subsidiary as being a similar credit risk as the parent. Initial price talk is +85 basis points on the 3-years and +110 basis points on the 5-years, which we view as fair. Finance subs of peers  Toyota Motor (TM) (A),  Honda Motor (HMC) (A), and
 Daimler (DAI) (BBB+) priced 5-year deals recently. These are now trading at spreads of 51, 70, and 92 basis points above Treasuries, respectively. While these all trade directionally in line with our credit views, we view the Toyotas and Daimlers as rich and the Hondas roughly fairly valued.  Volkswagen's (VOW) (A-) finance subsidiary's 5-year bonds issued in November recently were indicated at about 84 basis points above Treasuries, which we view as fair.

Our credit view on Nissan is supported by the firm's successful alliance and cross-ownership with  Renault (RNO) (BBB-), which has existed since 1999. This allows both companies to benefit from shared vehicle architectures, producing procurement benefits and operating leverage that will continue to result in cost benefits. Nissan's third-quarter results were meaningfully affected by production shutdowns in China driven by a sharp reduction in sales because of the island sovereignty issue between China and Japan. However, production recovered to near-normal levels by January and we expect stable operations going forward. Even though profitability is likely to be lower for the fiscal year ended March 2013 versus last year, we expect Nissan's results to improve over the next several years owing to new model introductions and cost benefits from its Renault alliance.

Maxim's 10-Year $500 Million New Issue Looks Attractive (March 11)
 
Maxim Integrated Products (MXIM) (A+, wide moat) plans to issue $500 million of 10-year notes, likely to replace $300 million of 3.45% notes that mature in June. Initial whisper talk was around 150 basis points over Treasuries, but we've heard the offering could tighten to +110 basis points. Even at +110 basis points, we believe the new offering is attractive. For comparison,  Broadcom's (BRCM) (A, narrow moat) 2.5% notes due in 2022 currently trade at about +95 basis points and 
 Texas Instruments(TXN) (A+, narrow moat) 1.65% notes due in 2019 trade around +55 basis points. While Maxim is significantly smaller than these two peers, we believe that it enjoys a stronger competitive position thanks to its position as a premier provider of highly differentiated analog chips for various electronic devices with long product life cycles. Maxim has pushed into higher-volume segments of the chip market, notably phones and tablets, where competition is stronger. But the firm's large base of industrial customers that use its proprietary analog chip designs provide stability.

Maxim also has a long history of maintaining a solid balance sheet. It doesn't have an immediate need for cash, as it held more than $1 billion at the end its fiscal second quarter (December) against only $300 million in debt. Most of that cash is available domestically as well. After this issuance and our assumed repayment of its existing notes, Maxim will carry gross leverage equal to about 0.6 times EBITDA, less than half the level at either Broadcom or TI. Maxim has generally been conservative in returning cash to shareholders as well. Its first priorities are to use cash for smaller acquisitions and to support its dividend.

Enterprise Products Partners to Issue 10-Year and 31-Year Bonds; Initial Price Talk Looks Attractive (March 11)
Wide-moat  Enterprise Products Partners (EPD) (BBB+) announced Monday that it plans to issue debt in two parts, 10-year and 31-year bonds, through its wholly owned operating subsidiary Enterprise Products Operating. Enterprise Products Partners conducts substantially all of its business through Enterprise Products Operating and guarantees the debt issued by Enterprise Products Operating. Proceeds will be used to repay amounts outstanding under the company's commercial paper program and its revolving credit facility, as well as principal repayment of maturing notes. Based on initial price talk of 135 basis points above the 10-year Treasury and 165 basis points above the 30-year, we view the new issues as attractive compared with our fair value estimate of +115 basis points for the 10-year notes and +155 basis points for the 31-year bonds. As of Dec. 31, 2012, $347 million of commercial paper was outstanding and we estimate that $550 million is currently outstanding on the revolving credit facility.

Our credit rating on Enterprise is driven by the firm's industry-leading size and the integration of its asset base across the midstream value chain. Enterprise gathers natural gas from wellheads, operates gas processing plants, transports both natural gas and natural gas liquids on dedicated pipelines to market hubs, provides storage and fractionation for NGLs, and markets natural gas and NGLs to the petrochemical industry. The majority of cash flows are fee-based, accounting for approximately 80% of the firm's revenue. This revenue is driven by throughput and only indirectly affected by commodity prices. As $3 billion in growth projects came into service in 2012, we project EBITDA to increase 15% in 2013 despite lower prices for NGLs, keeping leverage below 4.0 times despite a slate of debt-funded growth projects.

We view  Williams Partners (WPZ) (BBB) and  Kinder Morgan Energy Partners (KMP) (BBB+/UR), both of which we award a wide moat, as fair comparables for Enterprise. Williams' 3.35% notes due 2022 recently traded at a spread of 152 basis points over the 10-year Treasury, while its 6.30% bonds due 2040 traded at a spread of 194 basis points over the 30-year Treasury, both of which we view as close to fair value. Kinder Morgan's newly minted 3.50% notes due 2023 traded at a spread of 142 basis points over the 10-year Treasury, and newly issued 5.00% bonds due 2043 traded at a spread of 176 basis points over the 30-year Treasury. Due to integration risk surrounding several recent acquisitions, we believe Kinder's debt also trades close to fair value. Enterprise's outstanding 4.05% notes due 2022 traded at a spread of 107 basis points over the 10-year Treasury and its 4.45% bonds due 2043 traded at a spread of 151 basis points over the 30-year Treasury. Given our moat and credit ratings of Enterprise's comparables, spread levels on Enterprise's outstanding debt, and our projection for debt-funded growth projects, we believe fair value on the new issue 30-year bonds is approximately +155 basis points. Based on the average spread differential across these companies, we believe Enterprise's 10-year and 30-year debt should be approximately 40 basis points apart, pegging fair value on the new issue 10-year at +115 basis points.

Click here to see more new bond issuance for the week ended March 15, 2013.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.