The $375 million bond financing for the Southeast Supply Header pipeline was not the first in the market since the credit crunch, and it was not the largest. But the financing was the lowest-coupon deal to close in 2009, and was notable for dispensing with restrictive covenants. The deal, more than any other, restored the confidence that bond investors had in energy and infrastructure assets and paved the way for the more varied issuance of late 2009 and early 2010.

The sponsors of Southeast Supply Header (SESH) are Spectra Energy and CenterPoint Energy, each with a 50% share. CenterPoint, a Houston-based utility formerly known as Reliant, and Spectra, formerly Duke Energy's gas pipeline operations, signed an agreement to build the project in 2005.

SESH runs for 440km from the Perryville Hub, near Delhi, Louisiana, to Coden, Alabama, across the state of Mississippi. As a header pipeline it can run gas in two directions, though its main rationale is supplying gas from Texas and Louisiana to Florida, where the state's utilities are hungry for reliable onshore gas supplies. Hurricanes and other adverse weather events have disrupted supplies to the state in recent years.

The pipeline has a diameter of 36 inches, except for a first 185km section of 42 inches, of which El Paso subsidiary Southern Natural Gas owns the additional capacity. The remainder of the pipeline is under contract to utilities, which are prepared to sign long-term, eminently financeable, contracts to ensure reliability.

SESH was one of five debt financings that Spectra had in the market in 2009. It completed one corporate issue, at the SE Capital level, a $300 million issue for the Gulfstream pipeline, which it co-owns with Williams, and two issues for the Maritimes & Northeast Pipeline, for its US and Canadian legs, respectively, for which Emera and Exxon are co-owners.

The first deal that it formally sent to market was the US leg of Maritimes, which went out at the start of 2009, but attracted an indicative coupon of roughly 10%, and was withdrawn, before closing in May with Bank of America and Credit Suisse at 7.5%. But Martimes was dependent on one shipper, Spain's Repsol, which controlled capacity at Canaport, a liquefied natural gas terminal that would be serving the pipeline.

Spectra and CenterPoint discussed indicative pricing on SESH with banks at about the same time as Maritimes, and got a similar indicative coupon. A look at the private placement market suggested that lenders would want additional covenants. Since the two sponsors had already funded construction of the project with a mixture of equity and inter-company loans, they could afford to be patient.

The delay paid off. On 10 August, Deutsche Bank, Barclays Capital and Royal Bank of Scotland priced $375 million in five-year bonds for the pipeline at 212.5bp over the equivalent Treasury, for a coupon of 4.85%. The leads had initially expected the bonds to price at 237.5bp, but narrowed their price guidance to 225bp, before investor demand narrowed the spread to 212.5bp.

The issue enjoyed considerable advantages, including a short maturity and a basket of A-rated shippers. Nevertheless, and despite a roughly 100bp increase in the yield of the equivalent Treasury, the coupon came in at half the level that it would have expected in the first quarter of the year.

The buyers of the bonds were a mixture of bond funds and life insurance companies, primarily buy-and-hold investors. The pipeline did not noticeably open up the investor base for pipelines, but it enticed existing ones back to the market. The deal was three times oversubscribed.

The five-year maturity, while it offered better pricing at the time than a ten-year bond, also offered the issuer advantages during a transitional time in its operations. The pipeline came online in September 2008, and at completion only had 68% of its capacity under contract. At pricing the issuer had 77% of its 1 billion cubic feet of capacity contracted, and it hopes to have 92% taken by the middle of 2011.

The next year or two will offer opportunities for additional debt or a refinancing. The only covenants on the debt are a negative pledge and the sponsors' preference that the pipeline have an investment grade rating. If the additional contracted cashflows can reassure agencies, then additional bonds from SESH are a strong possibility. The project now has a Baa3/BBB- (Moody's/S&P) rating.

The agencies have become stricter with pipeline credits, fearing a looming glut in pipeline capacity. This stance will primarily hit issuers with less capacity contracted, or with fewer, lower-rated, shippers. The agencies' main demand on the sponsors of SESH was that they replace subordinated inter-company loans to the project with equity. Because of cost overruns, the pipeline has a capitalisation of $1.2 billion, so the pipeline has very low leverage, at least in nominal terms.

SESH was not the first or largest of the Spectra-sponsored financings to close last year, but the experience encouraged Spectra to take advantage of growing investor demand in the latter part of 2009. In fact, as Spectra's treasurer Allen Capps notes, in September, Spectra Energy Capital issued $300 million in 11-year notes to fund a large portion of its 2010 financing requirement.

Southeast Supply Header, LLC
Status: Closed 13 August 2009
Size: $1.2 billion
Location: Southern United States
Description: 440km bidirectional natural gas pipeline with a 1-1.5 billion cubic feet per day capacity
Sponsors: Spectra Energy and CenterPoint Energy (50%)
Debt: $375 million
Joint bookrunning managers: Deutsche Bank, Barclays Capital and Royal Bank of Scotland
Co-managers: Credit Suisse, HSBC, Morgan Stanley, Suntrust Robinson Humphrey
Trustee: Deutsche Bank
Maturity: 2014
Coupon: 4.85%
Underwriter legal: Chadbourne & Parke
Sponsor legal: Baker Botts