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Uncover the Editor's Digest: A Closer Look at Blackstone's Deal

2024-11-25

Blackstone's recent acquisition of a joint venture stake in interstate pipelines from US energy group EQT has sparked significant interest. This complex financing maneuver showcases how major corporations are turning to private capital giants to ease burdens on their balance sheets. Roula Khalaf, Editor of the FT, selects her favorite stories in this weekly newsletter, and this deal is one of them.

Blackstone's Pipeline Deal: A Game-Changer in Corporate Finance

Blackstone's Role in the Deal

The $1.1tn investment manager's fast-growing credit and insurance arm is set to finance the $3.5bn transaction, largely drawing on insurance capital. This move positions Blackstone head-to-head with rivals like Apollo as they venture into corners of financial markets previously dominated by traditional banks and bond markets. By using novel financing structures, Blackstone provides investment-grade companies with balance sheet relief without taking control of critical assets.Blackstone funds specializing in riskier credit or equity will invest in the junior portion of the deal with EQT. This allows them to tap into different segments of the market and generate returns. The deal is crucial for EQT to maintain its investment-grade rating, as having its rating cut even a single notch could push it to junk status and lead to higher borrowing costs.

The Details of the Deal

EQT will contribute its stakes in natural gas pipelines and other assets to the joint venture while retaining majority ownership. These projects are forecast to generate average earnings of $750mn a year through 2029. About 60 per cent of the cash produced will go to pay the Blackstone funds invested in the venture, with EQT keeping the remainder once Blackstone hits an agreed target for returns.Critically, because both EQT and Blackstone hold equity stakes in the joint venture, the financing will not be treated like debt by credit rating agencies. This provides EQT with a way to manage its debt load while still accessing capital.For example, like Apollo's recent $11bn financing for an Intel chip manufacturing plant in Ireland, this deal is a key strategy for EQT. Companies like Boeing and Intel have also sought creative financing ways to preserve their investment-grade ratings due to fears of downgrades cutting them off from crucial financing sources or making interest payment burdens more onerous.Private investment groups like Blackstone have stepped in to provide these solutions. The deals are structured to offer higher returns to insurance clients than similarly rated investment-grade bonds by relying on contracted cash flows from businesses like EQT's pipelines. These cash flows are then sliced and diced into individual tranches to divide the risk of payment shortfalls among different investors. The more senior portions are graded by credit rating agencies, making them suitable for insurers.

EQT's Position and Future Plans

EQT, which completed its near-$14bn takeover of Equitrans Midstream earlier this year, has been looking to reduce its debt load. Between this deal with Blackstone and other divestitures, EQT expects to end the year with $9bn of net debt. EQT also has the option to buy back Blackstone's stake in the joint venture in eight to 12 years, giving it flexibility in managing its assets.Blackstone is expected to earn a return of 8 per cent over the life of the deal. Although this is a higher cost of capital than some of EQT's existing debt (EQT's bonds maturing in 2034 on Friday traded with a yield of 5.6 per cent), it is lower than the cost of issuing new equity. This makes the deal an attractive option for both parties.In conclusion, Blackstone's deal with EQT is a significant development in corporate finance, offering unique solutions and opportunities for both companies. It showcases the evolving role of private capital in the financial landscape and highlights the importance of creative financing strategies in today's market.