NEW YORK--()--Fitch Ratings assigns a 'B+' rating to NuStar Logistics, L.P.'s (Logistics) proposed issuance of junior subordinated notes due 2043. The new notes are to be guaranteed by NuStar Energy L.P. (NuStar) and NuStar Pipe Line Operating Partnership, L.P. (NPOP). Proceeds are to be used for general partnership purposes which include the reduction of revolver borrowings which may be reborrowed to fund assets to be acquired. The notes are subordinated to the company's senior unsecured debt. Both Logistics and NPOP are the operating limited partnerships of NuStar, which is a publicly traded master limited partnership. Fitch has also affirmed the ratings of Logistics and NPOP.
Fitch rates Logistics and NPOP as follows:
--Long-term Issuer Default Rating (IDR) affirmed at 'BB';
--Senior unsecured debt affirmed at 'BB';
--Junior subordinated notes assigned 'B+'.
--IDR affirmed at 'BB';
--Senior unsecured debt affirmed at 'BB'.
Approximately $1.6 billion of existing senior unsecured debt at the combined partnerships is affected by today's rating actions (excluding the new junior subordinated notes). The Outlooks for Logistics and NPOP are Stable.
The junior subordinated notes are assigned 50% equity credit under Fitch's hybrid criteria. The notching of the junior subordinated notes reflects Fitch's criteria which typically notches such hybrid securities two notches down from the IDR.
Fitch Ratings downgraded the IDR of Logistics and NPOP in November 2012 which reflected the company's acquisition of assets from TexStar Midstream Services LP. The affirmed 'BB' rating reflects expectations for leverage to increase as a result of the company's acquisition of Eagle Ford assets for approximately $425 million in total. In December 2012, NuStar closed on the acquisition of crude oil assets for approximately $325 million. By the end of 1Q13, it expects to close on the acquisition of NGL assets for approximately $100 million.
Additional investments in the assets are expected to be in the range of $400 to $500 million over the next 18-24 months. The company plans to fund the acquisition with revolver borrowings and with the issuance of junior subordinated notes.
KEY RATING DRIVERS
Ratings concerns center on the company's relatively low liquidity and high leverage metrics; the execution risks associated with the acquisition of TexStar assets; and the significant increase in capex in 2013. Given NuStar's substantial investment in the acquisitions, and the need for the company to make additional investments in its latest acquisition to realize its full earnings potential, Fitch also believes there is increased risk that EBITDA growth may not meet expectations.
Factors which support the rating are NuStar's strong base of primarily fee-based and regulated pipeline, terminalling and storage assets and its shrinking footprint in the higher volatility asphalt refining segment. These assets accounted for 80% of segment EBITDA in 2011 and could increase to 90-95% by the end of 2013. The company sold 50% of its asphalt operations in 3Q12 and closed on the sale of its San Antonio refinery in January 2013. Other factors include expectations for significant growth in EBITDA in 2013 for the storage and transportation segments, and sizeable and geographically diverse assets.
As of Sept. 30, 2012 NuStar had $107 million of cash on the balance sheet. In addition, it had $1.1 billion of availability on its $1.5 billion revolver. However, liquidity is restricted by a leverage covenant and Fitch estimates availability to draw on the revolver was approximately $300 million. The company's $1.5 billion revolving credit facility expires in 2017.
In December 2013, the 21 million UK 6.65% term loan is due. In 2013, $230 million of notes are due in March and $250 million are due in June.
NuStar received approximately $115 million for the San Antonio refinery (including $15 million for inventories) in January 2013. By the end of 1Q'13, it expects to close on the $100 million of TexStar NGL assets.
Leverage as defined by the bank agreement is to be no greater than 5.0x for covenant compliance. However, if NuStar makes acquisitions which exceed $50 million, the bank defined leverage ratio increases to 5.5x from 5.0x for two consecutive quarters. Furthermore, the May 2012 bank agreement will exclude junior subordinated debt from the definition of debt for the leverage calculation if two of the three rating agencies assign the notes 50% equity credit. The junior subordinated notes meet Fitch's criteria for 50% equity credit.
NuStar has stated that leverage at the end of 3Q'12 was 4.3x as defined by the bank agreement and the maximum leverage allowed was 5.0x. Due to the acquisition of TexStar assets, the maximum leverage for 4Q'12, 1Q'13, and 2Q'13 will be 5.5x. Fitch believes liquidity may be tightened in 3Q'13 due to the maximum leverage ratio reverting to 5.0x.
With 50% equity credit assigned to the planned issuance of junior subordinated notes, Fitch still expects leverage (debt adjusted for cash held in escrow for the future funding of construction and 50% equity credit for the junior subordinated notes to adjusted EBITDA) to be in the range of 4.8 - 5.0x by the end of 2013.
Capital expenditures have been increasing. In 2011, capex was $336 million. NuStar has stated that in 2012, strategic capex is projected to be around $400 million and reliability capex is to be $45 million to $50 million. With the pending acquisition of the TexStar assets and plans to invest significantly in the assets, Fitch expects capital expenditures to increase again in 2013.
Logistics and NPOP are wholly owned subsidiaries of NuStar. NuStar guarantees the debt of Logistics and NPOP, and the debt instruments for the two operating partnerships have cross defaults and cross guarantees which closely link the ratings.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Significant leverage reduction. Should leverage fall below 4.5x on a sustained period of time, Fitch may take positive rating action.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Further deterioration of EBITDA;
--Inability to meet growth expectations associated with the pending acquisition given the substantial investment;
--Significant increases in capital spending beyond Fitch's expectations or further acquisition activity which have negative consequences for the credit profile;
--Increased adjusted leverage beyond 5.5x for a sustained period of time.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT Credit Analysis' (Dec. 13, 2012);
--'2013 Outlook: Crude Oil and Refined Products Pipelines' (Nov. 29, 2012);
--'Eagle Ford Shale Report: Midstream and Pipeline Sector - Economics Driving Growth' (Oct. 15, 2012);
--'Pipelines, Midstream, and MLP Stats Quarterly - Second Quarter 2012' (Sept. 27, 2012);
--'Top Ten Questions Asked by Pipeline, Midstream, and MLP Investors' (May 1, 2012);
--'Master Limited Partnerships 101' (Nov. 1, 2011);
--'Natural Gas Pipelines: Hot Topics' (Oct. 13, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
2013 Outlook: Crude Oil and Refined Products Pipelines
Eagle Ford Shale Report (Midstream and Pipeline Sector -- Economics Driving Growth)
Pipelines, Midstream, and MLP Stats Quarterly -- Second-Quarter 2012 (Second-Quarter Review)
Top Ten Questions Asked by Pipeline, Midstream and MLP Investors
Master Limited Partnerships 101
Natural Gas Pipelines: Hot Topics -- Long-Term Trends Affecting Pipeline Risk