El Paso Corp. Tuesday said it raised about $438 million in an offering of senior notes due Dec. 12, 2013. The proceeds will be used for general purposes, including repayment of debt due in 2009.

Maturities in 2009 include approximately $112 million of 6.375% notes due Feb. 1; approximately $539 million of 7.125% notes due May 6; and $413 million of 6.75% notes due May 15.

The notes have a coupon of 12%, issued at a discount generating a yield of 15.250%. El Paso expects closing to occur Friday. The offering is the first high-risk, high-yield offering since October. “Today’s successful debt offering demonstrates El Paso’s strength and ability to access the capital markets, even in these turbulent times,” said CEO Doug Foshee.

Moody’s Investors Service rated El Paso’s senior unsecured notes offering “Ba3.” Moody’s also affirmed the company’s “Ba3” corporate family rating and probability of default rating, the “Ba3” rating on existing senior notes, and the “Baa3” rating for all four of its majority-owned pipeline subsidiaries (El Paso Natural Gas Co., Southern Natural Gas, Tennessee Gas Pipeline Co. and Colorado Interstate Gas Co.). Moody’s also changed the rating on the senior secured credit facility to “Ba2” from “Ba1” and affirmed the “SGL-3” speculative grade liquidity rating. The outlook has changed to “stable” from “positive.”

Moody’s said the move to a stable outlook reflects El Paso’s tighter liquidity position as it heads into 2009 with a still aggressive capital expenditure (capex) plan, despite lowering it over the last few months, as well as less favorable momentum within its exploration and production (E&P) business than the positive outlook had anticipated.

“While the proceeds of the notes offering will enhance the company’s ability to handle the approximate $1 billion of debt maturities by May 2009, the company currently maintains a full spending plan that is expected to result in [El Paso] outspending its cash flow over the course of the coming year,” Moody’s said. Interest rates on high-yield bonds have doubled in recent months as they have been shunned by risk-averse investors. The Wall Street Journal reported that one source said prior to the issuance that the El Paso offering could provide a yield of 15% to 15.5%. The paper’s source also predicted a lot of interest in the offering from investors willing to take on risk for a “huge yield.”

In a third quarter filing with the Securities and Exchange Commission made last month, El Paso said the global financial crisis would affect its operations in several ways. “First, it may restrict our access to financial markets to fund our growth projects,” the company said. “When we do access the financial markets, it will be at a higher cost than that available prior to the current period of volatility.”

In the same filing El Paso said, “We do not currently contemplate having to access the capital markets until the second half of 2009…[W]e currently expect that we would seek to raise between $500 million to $800 million of capital in the second half of 2009. However, we will be opportunistic in accessing the capital markets prior to that time.”

Last month the company reported a spike in third quarter earnings despite Gulf Coast hurricanes that impacted some of its operations. Net income rose to $445 million (63 cents/share) in 3Q2008 from $155 million (21 cents) in the same period of 2007. After adjusting for production-related hedges and other items, El Paso earned 35 cents/share, which was up from 22 cents in 3Q2007 (see Daily GPI, Nov. 7).

The ratings agency cautioned that El Paso’s ratings could be lowered if overall liquidity does not improve, particularly if commodity prices remain soft and the company doesn’t further trim spending. “The company does have alternate sources of liquidity in the form of unencumbered assets; however, given the extremely difficult market conditions, the ability to quickly raise additional liquidity is not certain,” Moody’s said.

Moody’s noted that it expects El Paso’s production to remain flat for 2009 due to capital spending cutbacks that have brought spending down to maintenance levels. “If the company were to cut E&P capex further to preserve liquidity, the E&P segment would likely see a decline in its volumes. Further, given the weakness in commodity prices, Moody’s expects many E&P companies, including [El Paso], could face negative price revisions to their oil and gas reserves, which would impact capital productivity for the year.”

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