At least two investors are looking to buy the bonds of NiSource Inc. on weakness following an expected downgrade and further spread-widening. Moody's Investors Service put the utility on review for a downgrade to junk last Tuesday, sending bids on the 6.15% notes of '13 (Baa3/BBB) some 50 basis points wider to 190 over Treasuries.
Andy Aran, a senior portfolio manager in the global bond group at Alliance Capital, is puzzled by the ratings agency's decision. "NiSource seems to have the credit metrics of a low investment-grade company. It has improving leverage, mostly regulated utility businesses, and reasonable cash flows," he says. Alliance trimmed exposure to the name for accounts that are not allowed to own high-yield securities. For other accounts, Alliance may look to add if a downgrade comes and prices widen further, Aran says.
NiSource has $6.7 billion in debt, about 3.8 times its EBITDA, notes a New York-based buy-side analyst. He says that DTE Energy, a comparable credit, is more highly levered and is rated Baa2 by Moody's. "NiSource levered up significantly two years ago [to acquire Columbia Energy Resources.] Why not downgrade them back then?" He says his firm will look to buy NiSource's bonds after a downgrade, which he expects.
John Diaz, managing director at Moody's, says debt-to-EBITDA can be a misleading ratio, because it does not account for interest payments or dividend payouts, which he says are high in NiSource's case. He says Moody's did downgrade NiSource when the Columbia acquisition was announced, and had the company on negative outlook for close to a year. "We acknowledged they've reduced debt, but we put them on watch because we realize they have a way to go," he says.