The stock market's order book for retail bonds (ORB) got another boost with the news that North Sea oil producer
In common with most of the bond issues we've seen since the ORB market opened, Enquest is tapping private investors as a way of diversifying its reliance on the bank market for funds. The frozen market of 2008 is not an experience that company treasurers would wish to repeat and retail bonds can play an important part in the funding structure for companies. Most recent issues have been for between £55m-£75m, but this makes up a large proportion of funding needs within any given year.
Interest rate management is less of an issue for companies than maturity of funding. In Enquest's case, chief finance officer Jonathan Swinney said the company would currently pay about 2.5 per cent interest if it drew down on its $900m bank facility: "It isn't really the long-term interest rate that is the problem, but rather the length of funding within our capital structure. Lengthening out part of the funding to between eight and 10 years makes issuing bonds is attractive as banks will generally only lend for around four years," he said.
Enquest's ability to meet the bond coupon is also important to fixed income investors. Last year the company produced cash flow from operations of more than $656m (£410m), giving it a net cash balance at the end of the year of $378m. Since then it has been acquiring assets to bulk up its operations and cash at the half-year stage had fallen to about $92m; the most recent acquisition was an £18.75m purchase of 8 per cent of the Alba oil field in the North Sea. The producing field should guarantee that the company achieves its production target of between 23,000-28,000 barrels a day this year.
This is an interesting addition which diversifies the offering on the ORB market, but investors will need to see more detail before deciding to get involved. On the face of it, Enquest will have little trouble meeting the obligations that come with retail bonds. The final details are in and Enquest is offering a 5.5 per cent coupon with a 2022 redemption. Await documents.
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