July 27 (IFR) - When oil refiner Northern Tier Energy
marketed its IPO this week, it promised investors far more yield
than would normally be available, by offering them direct
exposure to a commodity in the form of a publicly traded
But their chosen structure -- known as a variable-pay master
limited partnership (MLP) -- ended up pricing at just $14 per
share, well below the $19-$21 the company had been expecting.
Connecticut-based Northern Tier told investors that
the variable-pay MLP would distribute all available cash. In
good times, the payouts would rise; in bad times, they would
They are only the fourth company ever to issue a
variable-pay MLP, which has introduced the element of volatility
to the traditionally staid MLP asset class.
"The whole purpose of the variable MLP is to be variable,"
said Tim Fenn, a partner at Latham & Watkins, in a recent
webcast about the fledgling asset class.
"There is nothing wrong with the fact that if the commodity
price moves in the wrong direction, then the yield is going to
move up, because the expectation is that it will go down at some
point in time," he said. "The investor base is expecting to be
able to play the commodity itself in a public security."
In the case of Northern Tier, which is backed by affiliates
of ACON Refining Partners and Texas Pacific Group, the company
was forced to accept pricing on its 16.25m unit IPO at just
That pricing set the implied yield on the units at a
staggering 19.1%, versus 13.4% at the original guidance pricing.
The company believes it can meet that target by distributing
US$245.9m to investors over the next year, to set the targeted
pay out at US$2.68/unit. It is projecting a $92.7m payout in the
September quarter, followed by $73.3m, $57.1m and $22.8m through
June 30, 2013.
The low pricing has raised questions about the usefulness of
the variable-pay MLP model.
On the basis of EV-to-Ebitda, Northern Tier garnered a
forward multiple of about 5 times, based on the consensus
estimates of the underwriting banks -- Goldman Sachs, Barclays
and Bank of America Merrill Lynch -- used in the marketing. That
compares to 4.7 times for HollyFrontier, a C-Corp refiner viewed
as the purest comparable.
"If you don't get a step-up in valuation by offering yield,"
said one banker, "you have to question why companies would elect
to structure as an MLP."
A DIFFERENT KIND OF INVESTOR?
There was a view that the variable-pay structure would open
up the capital markets to a wider variety of companies, drawing
in investors with the promise of higher yield.
But traditional buyers of MLPs, accustomed to predictability
of cashflow streams from diverse holdings of low-risk pipeline,
gathering and storage assets, are hesitant to accept variability
and single-asset risk. Sector-specialist funds are more likely
to benchmark against tax-paying C-Corp comparables; and retail
investors, a typical MLP target, are not ideally suited to the
variable-pay MLP because of the inherent volatility of the
Roughly 70% of Northern Tier's IPO was allocated to
institutions, including dedicated MLP funds, sector specialists
and income -- a much higher percentage than the 50% typical on a
traditional MLP IPO.
"To a certain extent we're in uncharted waters," said one
MLP banker who worked on the deal.
"Each of the variable-pay MLPs are somewhat unique," The
banker said. "There is a lot more price discovery than on a
traditional MLP. You are educating on structure, but more so on
the specifics of the underlying asset."
Only three other companies have used the structure for their
IPOs -- propane-dehydrator PetroLogistics in May, and
fertiliser-manufacturers CVR Partners and Rentech last year.
The experience of PetroLogistics, a manufacturer of
propylene, has highlighted the risks inherent to commodity-based
The global economic slowdown led to softening prices for
propylene, a basic industrial feedstock made either as a
derivative of oil or, in the case of PetroLogistics, natural
PetroLogistics on Thursday said it would pay a
second-quarter pro-rated distribution of 26 cents from the May
IPO (45 cents for the full quarter) based on distributable
It earned only an average spread of 37.9 cents per pound on
the 310m pounds of propylene sold during the period -- short of
the 39.6 cents estimated in its IPO prospectus and estimates of
43 cents earlier in the roadshow.
On that news, the company's units fell 28 cents, or 2.6%, on
Friday to US$10.57, down 41.3% from its US$18 debut.
On that news, the company's units initially fell Friday but
have since recovered to $11.07, up 22 cents, or 2%, but well
below its $18 debut.
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