March 4, 2002; Kinder Morgan Faces Possible Credit Crunch 

Otherwise preoccupied in a meeting with a sound company on Thursday, we listened to a replay of the Kinder call late Thursday evening.  We picked up some insight not likely to be emphasized in any sycophantic reiteration.  The company is now in the most vulnerable position we had feared a few weeks ago.  A $750 million acquisition has been closed and long term financing has not been arranged.  Apparently the acquisition was financed with commercial paper placed before the stock dropped sharply.  The likelihood of safe money market funds and corporations rolling over those short-term loans over the next few weeks appears seriously diminished in our opinion.  Just in case of a ripple effect we are transferring some of our personal cash reserves from money market funds to treasury bills on the next auction.

Nor is it clear that Kinder Morgan has sufficient bank lines to back up its commercial paper if the market refuses to accept any renewals.  Apparently the company found it necessary to negotiate a waiver of normal credit restrictions to get it through the next few months. 

It is also apparent that the company is conceding that it is unwilling to sell equity securities in the current environment.  That seems to be the reason for postponing an offering until May.   

Nor are the long-term credit markets likely to be receptive.  Junk status for Kinder's debt seems overdue.  By our work, KMI has a debt ratio second only to AES among peers and higher than Calpine. The credit rating agencies, paid as they are by the issuers of debt, seem slow to make negative changes.  Psychologically they may feel more comfortable making a negative decision only after it becomes obvious.  Triggering events can be rejection by the commercial paper market, possibly imminent, or the steep decline in stock price that recently occurred. 

There were more red flags in the PR call such as possible overpayment for the just completed acquisition.  The company discloses that Ebitda for the asset was far less in the year just completed than what it projects for the year ahead.  Also the company's terrorist insurance appears to end in a few months and it may or may not be renewed at a rate that is benign to the distribution.  We are not trying to be alarmist as almost anything could be a terrorist target.  Nonetheless the company will want coverage on facilities like the Carteret fuel tanks near Newark Airport.