Fitch Ratings has downgraded NGL Energy Partners LP's (NGL) Long Term
Issuer-Default Rating (IDR) to 'B+' from 'BB'. NGL's senior unsecured
rating has been downgraded three notches to 'B-' from 'BB-'. The
Recovery Rating has been lowered to RR6 from RR5. The Rating Outlook has
been revised to Negative from Stable. A full list of today's actions
follows at the end of this release.
Fitch has also downgraded NGL Energy Finance Corp.'s senior unsecured
debt rating two notches to 'B-'/RR6. NGL Energy is the co-issuer for
NGL's senior unsecured notes.
KEY RATING DRIVERS
The downgrade is driven by Fitch's concerns about NGL's liquidity
position given its plans for spending $350 to $400 million over the next
12 - 18 months and its annualized distribution of $332 million. Thus
far, the MLP has not been able to complete its offering of $300 million
notes due 2020. The note offering was launched on November 30th. Access
to equity markets does not appear to be available to NGL given the
current 27% yield on common units.
Other concerning factors include Fitch's forecast for higher leverage at
NGL given the current weak commodity price environment and expectations
for further increased secured borrowings. Additional concerns include
NGL's counterparty risk since Fitch expects it to have a growing amount
of exposure to smaller exploration and production customers which tend
to have a greater degree of counterparty risk.
On December 11th, NGL announced that distributions will now be flat.
Distributions will remain a significant cash outflow estimated to be
$332 million on an annualized basis.
In addition, the partnership announced its plans to raise liquidity
through the issuance of preferred equity, asset sales, bank debt and
unsecured indebtedness. The success of future capital raises should help
NGL's liquidity needs. However, Fitch's rating action and Negative
Outlook incorporates these planned efforts for liquidity while
recognizing continued execution risk in what has been very constrained
capital market conditions for midstream energy issuers. Fitch notes that
NGL does not have any near term debt maturities.
The 'B+' rating is supported by NGL's diverse assets which are located
throughout the U.S. The partnership has significantly expanded in size
and scale since its IPO in 2011. NGL has significant senior secured debt
which totalled $2.2 billion as of Sept. 30, 2015 and ahead of its senior
unsecured debt. Therefore, the senior unsecured debt is notched down two
from the IDR to 'B-' and the Recovery Rating is RR6. The RR6 indicates
poor recovery prospects in the event of a default at the unsecured level.
NGL's capex requirements will be $350 million to $400 million over the
next 12 - 18 months. Prior public guidance was $345 million for FY16
organic growth spending. NGL now plans to hold distributions flat in
calendar year 2016 (estimated to be $83 million a quarter). Prior
guidance was for distribution growth of 6% in FY16 and 8% beyond then.
Diverse Operations: NGL's assets are diverse and comprised of liquids
(approximately 20% of EBITDA excluding G&A for FY15), crude oil
logistics (15%), water solutions (27%), retail propane (21%), and
refined fuels and renewables (17%). NGL's strategy is to focus growth on
crude logistics, water solutions and refined fuels and renewables. NGL
also owns the general partner and 19.7% of the LP units of
TransMontaigne Partners LP (TransMontaigne).
Leverage: For the latest-12-months (LTM) ending Sept. 30, 2015, NGL's
adjusted leverage (defined as debt less $250 million of TransMontaigne's
debt to adjusted EBITDA) was 6.0x, which was above Fitch's prior
expectations following significant acquisition activity. Fitch has
upwardly revised its forecast for FY16 leverage and now expects it to be
in the range of 6.5 - 7.0x, up the prior forecast of 6.25 - 6.5x. As new
projects come online, Fitch projects leverage to improve. A significant
project for NGL is the Grand Mesa pipeline which is to be in service in
September 2016, and NGL expects it will generate $160 million of EBITDA
a year, which should reduce leverage to a range of 6.0 - 6.5x by the end
of FY17. The partnership's leverage could vary significantly depending
on the manner in which NGL funds spending.
Distributable Cash Flow and Distribution Coverage: For the LTM ending
Sept. 30, 2015, distributable cash flow was $332 million, up from $272
million generated during fiscal year 2015. NGL's distribution coverage
ratio was 1.16x for the LTM ending
Sept. 30, 2015 which is a slight decrease from 1.2x for fiscal year
2015. Fitch expects it to be at or just below 1.0x at the end of FY16
even with flat distributions going forward. The coverage ratio is
expected to be approximately 1.0x in FY17 provided distributions remain
Fitch's key assumptions within the rating case for NGL include:
--EBITDA growth continues given NGL's history of acquisitions and
substantial growth spending over the next 12 - 18 months;
--Distributions are flat;
--Grand Mesa's EBITDA run rate meets management's expectations of $160
million a year once in service (September 2016);
--Fitch assumes NGL will be able to execute on its plans to raise
liquidity as it has publicly stated.
Positive: Future developments that may, individually or collectively,
lead to positive rating action include:
--Leverage at or below 5.5x on a sustained basis;
--Fee-based arrangements accounting for greater than 60% of cash flows;
--A significant increase in retained cash and/or a demonstrated
sustainable ability to access capital markets for liquidity needs will
be required for any future positive rating action.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Inability to raise funds for liquidity;
--Deterioration of EBITDA;
--Significant increases in capital spending beyond Fitch's expectations
or further acquisition activity that have negative consequences for the
credit profile (e.g., if not funded with a balance of debt and equity);
--Increased adjusted leverage beyond 6.5x for a sustained period of time;
--Distribution coverage below 1x for a sustained period of time.
As of Sept. 30, 2015, NGL had a $2.296 billion secured bank facility
comprised of a $1.038 billion working capital facility (which is
restricted by a borrowing base) and a $1.258 million expansion facility.
The working capital facility had borrowings of $656 million and letters
of credit totalling $90 million. The expansion facility had drawn $1.083
billion leaving capacity of $175 million. In October 2015, NGL amended
the bank agreement and upsized the acquisition facility by $150 million.
NGL's bank agreement extends through 2018.
In addition to the bank agreement having borrowing base restrictions on
the working capital revolver, financial covenants do not allow leverage
(as defined by the bank agreement) to exceed 4.25x; with permitted
acquisitions, it temporarily increases to 4.5x. In addition to the
working capital borrowings and letters of credit being excluded from the
leverage calculation, NGL gets pro forma EBITDA credit for acquisitions.
Pro forma EBITDA credit for material projects or acquisitions is typical
for MLP bank agreements. The bank defined leverage ratio was 3.5x as of
Sept. 30, 2015.
NGL does not have any significant debt maturities until 2018 when the
bank agreement expires. After that, it has $400 million of notes due in
Fitch expects NGL to generate distributable cash flow in the range of
$275 - 300 in FY16. NGL has announced no intention of cutting its
distributions, but Fitch believes distribution cuts could help fund
liquidity needs if capital market access remains constrained.
Fitch has downgraded the following:
NGL Energy Partners LP
--Long Term IDR downgraded to 'B+' from 'BB';
--Senior Unsecured downgraded to 'B-'/RR6 from 'BB-'/RR5.
NGL Energy Finance Corp.
--Senior Unsecured downgraded to 'B-'/RR6 from 'BB-'/RR5.
The Rating Outlook is revised to Negative from Stable.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers (pub. 07 Dec 2015)
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