The Pipeline Project Preparing for Canada’s Largest Ever Corporate Bond Deal

In a landmark move for the Canadian financial markets, Coastal GasLink LP, partially owned by KKR & Co., is set to initiate the largest corporate bond deal in Canada's history. The pipeline project, located in Western Canada, is preparing to issue up to C$4 billion ($2.9 billion) in bonds to refinance its existing construction debt. This unprecedented offering is scheduled for early June, according to sources familiar with the matter.

The Coastal GasLink project, a 416-mile natural gas pipeline, has faced significant challenges since its inception over a decade ago. Regulatory hurdles, political disputes, and labor issues have contributed to the project's escalating costs, which have more than doubled from the original estimate of C$6.6 billion to C$14.5 billion. Despite these obstacles, the pipeline is nearing completion, necessitating the refinancing of its construction credit facility.

The planned bond issuance, even at the lower estimate of C$3 billion, will rank among the top three largest corporate bond deals ever recorded in Canada. The deal is expected to form part of a broader C$9 billion fixed-income financing strategy for the pipeline, highlighting the substantial financial commitment required to bring the project to fruition.

The Coastal GasLink pipeline is a crucial component of Canada's energy infrastructure, transporting natural gas from the Montney shale formation in Western Canada to the LNG Canada terminal on the west coast. At the terminal, the gas will be converted to liquefied natural gas (LNG) for export, primarily targeting Asian markets. Demand from countries such as China and India is anticipated to support Canadian supply despite competitive pressures from Middle Eastern producers.

Imran Chaudhry, a senior portfolio manager for fixed income at Fiera Capital Corp., expressed optimism about the deal's prospects, noting the importance of issuer diversification in the Canadian market. "Given that issuer diversification is an important factor for most of the largest buyers of investment-grade credit in Canada, this deal will certainly help with increased diversification, resulting in higher investor demand," Chaudhry said.

This significant financial maneuver comes on the heels of unusually high options trading volume for TC Energy Co., a stakeholder in the Coastal GasLink project. On Wednesday, TC Energy experienced an options trading surge, with 16,157 put options acquired, marking a 1,446% increase from typical volumes. 

TC Energy, which holds a 35% stake in Coastal GasLink, has been actively engaging with potential private bond investors to refinance its share of the construction debt. Representatives from KKR and Alberta Investment Management Corp., which together hold the remaining 65% stake, have declined to comment on the bond issuance.

The Coastal GasLink project underscores the complex relationship between Canada's energy sector and its climate commitments. While Prime Minister Justin Trudeau's government aims to reduce reliance on fossil fuels, the oil, gas, and consumable fuels sector remains a significant part of the Canadian economy, comprising approximately 18% of the S&P/TSX Composite Index.

By Julianne Geiger for Oilprice.com

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