NEW YORK--(BUSINESS WIRE)--A phase-out of the pass-through tax status of U.S. master limited partnerships (MLPs) could result in a significant restructuring of the sector with different implications for both bond and equity holders, according to a Fitch Ratings report.
The longstanding focus in Congress on locating new sources of tax revenue and the fact that the sector has seen explosive growth over the last several years highlight the importance of examining any potential impact of a phase-out scenario on MLP issuers. That said, Fitch believes there is little likelihood of the MLP tax advantage changing in the near-to-intermediate term.
As discussed in the report, the change in tax status for Canadian Income Trusts provides an example of what effect a modification in tax status for MLPs could entail. Fitch believes any change of tax status for MLPs could result in similar outcomes but given the larger size of the tax shield in the U.S. relative to Canada, a potentially more robust industry response from MLPs. Fitch expects that the largest initial effect would be on an MLP's publicly traded units. For bondholders, the impact would be less immediate and direct and would be greatly influenced by the details behind the changes.
A tax status change would eliminate the cost-of-capital advantage that MLPs have traditionally had in bidding for industry assets against traditional corporate competitors. This is likely to underscore the importance of size, scale, and efficiency of operations for remaining MLPs, and could result in a wave of consolidation as issuers bulk up to achieve scale in order to better compete. Smaller names, Fitch believes, would be attractive candidates for merger and acquisition activity.
Fitch would address any ratings implications for MLPs due to a change in tax status on a case-by-case basis after a full determination of the final effects of tax changes and the MLP response. Generally, Fitch would not expect the credit profiles for investment-grade MLPs to change dramatically.
The full report 'Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs' is available at 'www.fitchratings.com.'
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs