Moody’s Investors Service, (“Moody’s”) assigned a Ba2 rating to Energy Transfer Equity, L.P.’s (ETE) proposed offering of a $2.2 billion senior secured term loan due 2024. The Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default Rating (PDR), SGL-3 Speculative Grade Liquidity Rating and negative outlook are not affected by this action.
Proceeds of the offering will be used to refinance ETE’s existing $2.2 billion term loan scheduled to mature December 2, 2019. The term loan will be secured by the same collateral that secures ETE’s existing senior secured notes, a first-priority lien on substantially all of ETE’s tangible and intangible assets, comprised principally of its equity interests in its subsidiaries, and will rank pari passu with ETE’s revolving credit facility and its senior secured notes.
“Moody’s views the term loan issue as an ongoing exercise in managing ETE’s financial flexibility and extending debt maturities,” commented Andrew Brooks, Moody’s Vice President. “The proposed term loan refinancing will have no material impact on ETE’s debt leverage, either on a stand-alone or fully consolidated basis.”
Assignments:
..Issuer: Energy Transfer Equity, L.P.
….Senior Secured Term Loan, Assigned Ba2 (LGD3)
RATINGS RATIONALE
ETE’s senior secured Ba2 rating is equal to its Ba2 CFR. ETE’s notes, term loan and revolving credit facility are all secured on a pari passu basis by all tangible and intangible assets of ETE, essentially its ownership of and equity interests in the common units of its subsidiaries and the entities in which subsidiary IDRs are held. There are no upstream or downstream debt guarantees between ETE and its subsidiary holdings. ETE’s Ba2 CFR, term loan and notes ratings reflect its stand-alone credit assessment as well as an analysis under Moody’s Loss Given Default (LGD) methodology, which essentially views ETE level debt as holding company debt structurally subordinated to debt at its operating subsidiaries.
ETE’s negative outlook is consistent with the negative outlook at ETP, and further reflects its consolidated and stand-alone leverage metrics. ETE’s ratings could be downgraded should consolidated leverage remain on a permanent basis over 6x. A downgrade of ETP’s Baa3 rating to below investment grade could prompt an ETE rating downgrade. Should cash distributions to ETE become compromised through higher leverage or weakness in distributable cash flows at partnership and subsidiary levels, ratings could be downgraded. ETE’s rating could be upgraded if its stand-alone leverage approaches 2.5x and consolidated leverage drops below 5x. An upgrade of ETP’s Baa3 rating could prompt an ETE rating upgrade.
ETE’s Ba2 CFR recognizes the very large size, scope and diversification of the midstream asset base over which it wields control. The rating is heavily influenced by the asset quality and cash flows generated by the entities controlled by ETE, principally Energy Transfer Partners, L.P. (ETP, Baa3 negative), a publicly traded master limited partnership (MLP) in which ETE holds the general partnership (GP). Underpinning the credit of ETP is the asset composition of its midstream portfolio and the predominantly fee-based cash flow stream generated by these assets. ETP’s negative outlook, however, reflects a deterioration in its leverage metrics. ETP’s weak 2016 distribution coverage will be restored to over 1x as an outcome of the pending acquisition of ETP by Sunoco Logistics Partners L.P. (SXL, rated entity Sunoco Logistics Partners Operations L.P., Baa3 negative), which is expected to close by the end of 2017’s first quarter. The increase in ETP’s leverage and reduced coverage are largely an outgrowth of a decline in natural gas gathering and processing (G&P) segment EBITDA and regulatory delays affecting the completion of several major projects, which contributed to the increase in ETP’s year-end debt/EBITDA to over 5.5x. ETE’s debt/EBITDA fully consolidated for ETP at September 30 exceeded 6x, and on a stand-alone basis (recourse debt over cash distributions received) approximated 4x, both levels excessive for the Ba2 rating. Moreover, ETE’s $6.4 billion of stand-alone debt is structurally subordinated to the roughly $30 billion of debt (proportionately consolidated) at its subsidiary entities. Debt service is almost entirely dependent on distributions from ETP, including GP incentive distribution rights (IDRs), a distribution stream which is junior to ETP’s own significant financing and operating requirements. ETE’s credit profile is further challenged by its aggressive growth objectives and high distribution payout atop a complex organizational structure.
ETE’s liquidity is adequate and its day-to-day liquidity needs are not significant, since it is essentially a flow-through partnership entity with limited administrative overhead. ETE maintains a $1.5 billion secured revolving credit facility, under which $885 million was outstanding as of September 30. ETE has no capital spending requirements. All subsidiaries are financed with subsidiary level debt, and aside from the potential to provide capital with new equity or temporarily relinquishing a portion of its IDR proceeds, ETE has no obligation to provide liquidity to its subsidiaries. ETE has provided ETP with $892 million of IDR waivers over 2017-2019, and on January 9, 2017 issued $580 million of equity whose proceeds were injected into ETP through a purchase of ETP common units.
The principal methodology used in this rating was Global Midstream Energy published in December 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Energy Transfer Equity, L.P. headquartered in Dallas, Texas is the general partner of Energy Transfer Partners, L.P.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
