Fitch Ratings has assigned NGL Energy Partners LP's (NGL) issuance of
senior unsecured notes due 2020 a 'BB-' rating. The Recovery Rating is
RR5. The notes are to be co-issued with NGL Energy Finance Corp. and are
to rank pari passu with the partnership's senior unsecured debt.
Proceeds are to be used to repay revolver borrowings and for general
Fitch currently rates NGL's Long Term Issuer-Default Rating (IDR) 'BB'.
NGL and NGL Energy Finance Corp. senior unsecured debt is rated
'BB-'/RR5. The Rating Outlook is Stable.
KEY RATING DRIVERS
The 'BB' IDR rating is supported by NGL's strategy to maintain strong
distribution coverage and operate diverse assets which are located
throughout the U.S. The partnership has significantly expanded in size
and scale since its IPO over four years ago. NGL has significant senior
secured debt ahead of its senior unsecured debt and therefore, the
senior unsecured debt is notched down one from the IDR to 'BB-' and the
Recovery Rating is RR5. The RR5 indicates a below average recovery in
the event of a default.
Concerns include NGL's quick growth through multiple acquisitions over a
short period of time and high leverage. Fitch believes that growth
spending, including acquisitions, will continue to be significant for
NGL as it seeks to expand its operations and increase distributions paid
to unitholders. NGL's management has a solid history of making
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 is above Fitch's prior
expectations following significant acquisition activity. 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 will generate $160 million of EBITDA a year, which
should reduce leverage to a range of 5 - 5.5x 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's key assumptions within the rating case for NGL include:
--EBITDA growth at a significant pace following acquisitions and
substantial growth spending;
--Acquisition activity is expected to continue;
--Distribution growth increases at a measured pace;
--Grand Mesa's EBITDA run rate meets management's expectations of $160
million a year once in service (September 2016).
--Fitch assumes primarily debt funding in FY16 for capital needs, and
more balanced equity/debt funding in outer years.
Positive: Future developments that may, individually or collectively,
lead to positive rating action include:
--Increase of size and scope of operations such that EBITDA exceeds $500
million while leverage is below 4.5x on a sustained basis;
--Fee-based arrangements accounting for greater than 60% of cash flows.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--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 5.5x 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.
Fitch expects NGL will continue to generate credit ratios which provide
it with sufficient covenant cushion for the bank agreement. NGL does not
have any significant debt maturities until 2018 when the bank agreement
Fitch rates the following:
NGL Energy Partners LP
--New Senior Unsecured Notes Due 2020 'BB-'/RR5.
Fitch currently rates the following:
NGL Energy Partners LP
--Long-Term IDR 'BB';
--Senior Unsecured 'BB-'/RR5.
NGL Energy Finance Corp.
--Senior Unsecured 'BB-'/RR5.
The Outlook is Stable.
Date of Relevant Rating Committee: 8 October 2015
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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