The arbitrage of a pipeline

7 minute read

A recent trend in hydrocarbon funding is for public bond investors to provide leverage – through bonds – in transactions where oil and gas company assets, in these examples midstream pipeline assets, have been taken “private”.

This note analyses two transactions (with private consortiums led by EIG Energy Partners and BlackRock respectively) of size where private capital managers have bought oil and gas pipeline cash-flows/leases and obtained leverage for the transactions through large benchmark bond issuances.

Despite being SPVs, these bonds have businesses exclusively reliant on oil and gas production. The note analyses the structural set-up as well as hypothetical financial considerations for the structures.

We recommend that: (1) the bond issuing SPVs should seek stand-alone ESG ratings, to increase transparency and avoid the bonds – as has happened – entering ESG indices where the parent oil and gas company has been excluded; and (2) European regulators should examine why these vehicles are set up under Luxembourg jurisdiction, despite having almost no economic relationship to the European Union, and if these SPVs should be subject to the Corporate Sustainability Reporting Directive (CSRD).