NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) and senior unsecured rating for Buckeye Partners, L.P. (Buckeye) at 'BBB-'. The Rating Outlook remains Stable.
KEY RATING DRIVERS
Buckeye's 'BBB-' rating for the IDR and senior unsecured debt is based on the partnership's size, geographic diversity, and ability to invest in growth opportunities which should drive increases in EBITDA and distributable cash flows. Past acquisitions and strategic growth capex initiatives have already proven to drive EBITDA growth, and Fitch expects adjusted leverage (defined as debt to adjusted EBITDA) to be between 4.5x and 4.8x over the next couple of years.
Following significant acquisitions in early 2011, adjusted leverage increased and was as high as 5.5x at year-end 2011. Since the end of 2012, adjusted leverage has improved. Fitch expects leverage will remain below 5.0x going forward even in a low priced commodity environment given that over 90% of cash flows are from fee-based activities. Furthermore, the partnership is dedicated to keeping healthy credit metrics and has historically demonstrated its commitment with equity issuance.
The recommendation for the Stable Outlook is based on expectations that EBITDA and distributable cash flow should continue to grow and that leverage is not expected to return to past levels where it exceeded 5.0x for a period of time.
Concerns include the potential for future projects to slow if commodity prices remained depressed for an extended period of time. Like many other MLPs, Buckeye currently has a high cost of capital for equity given the yield on its common units. Following its 2010 acquisition of its general partner, it does not pay incentive distribution rights to its general partner which does benefit its overall cost of capital. While other factors for concern include the partnership's acquisitive nature, Buckeye has historically demonstrated its ability to fund growth with a combination of debt and equity. The distribution coverage ratio is expected to remain close to 1.0x which is adequate, but if the coverage ratio falls below that Fitch would be concerned about how the shortfall would be funded.
Impact of Weak Commodity Prices: With the ongoing depressed commodity prices, Buckeye has seen some areas of business show some weakness while other segments have benefited. Continued soft crude prices will lead to weaker results from butane blending since the spread between butane and gasoline has narrowed. Settlement revenues from vapor recovery units will also be hurt since the value of the recovered products is lower. These weaknesses are more than offset by benefits that Buckeye has due to lower commodity prices. The partnership benefits from contango markets which have driven demand for storage. Volumes have increased for its pipelines and terminals and storage utilization has been high. Fitch expects to see volumes continue to increase as expansions and new projects come online.
Leverage: Adjusted leverage (defined as debt to adjusted EBITDA) has been improving over the past few years. While debt has been on the rise, EBITDA growth has occurred at a faster clip allowing adjusted leverage to fall to 4.5x for the LTM ending June 30, 2015. Leverage has declined from 4.7x at the end of 2014 and 5.1x at the end of the prior year. Fitch expects yearend leverage to be in the range of 4.5-4.8x through 2017.
Distribution Coverage: Fitch expects Buckeye to generate distributable cash flow sufficient to cover its distributions over the next couple of years. The distribution coverage ratio is expected to be approximately 1.0x which is fairly in line with Buckeye's historical results although it has periodically dipped below that.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Buckeye include the following:
--EBITDA and distributable cash flow continue to increase as new projects come on line.
--Higher distributable cash flow will allow the partnership to increase distributions at a modest pace while maintaining a distribution coverage ratio of approximately 1.0x.
--The partnership continues to make acquisitions which are funded with both debt and equity. Fitch has assumed over $1 billion in acquisitions through 2018.
--Growth capex continues to be significant as the partnership seeks new organic opportunities. Fitch has assumed growth spending of $300-$450 million annually through 2018, based on 2014's spending for growth.
--Maintenance capex modestly increases in each progressing year.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Significant leverage reduction. Should leverage fall below 4.0x over 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:
--Reduced liquidity;
--Inability to meet cash flow expectations associated with past acquisitions or expansion projects given the substantial investments;
--Significant increases in capex or acquisitions not funded in a balanced way;
--Increased adjusted leverage beyond 5.5x for a sustained period of time and distribution coverage below 1.0x.
LIQUIDITY
As of June 30, 2015, the partnership had $8.6 million of cash on the balance sheet. In addition, it had $1.1 billion of additional borrowing capacity on its $1.5 billion unsecured revolver. The nearest debt maturity is 2017 when $125 million becomes due.
In September 2014, Buckeye upsized and extended its $1.25 senior unsecured revolver due 2017. The new revolver size is $1.5 billion, and it matures on Sept. 30, 2019.
Borrowers on the revolver are Buckeye Partners, L.P. (Buckeye), and its indirect wholly-owned subsidiaries Buckeye Energy Services LLC (BES), Buckeye Caribbean Terminals LLC (BCT), and Buckeye West Indies Holdings LP (BWIH). BES, BCT and BWIH are collectively referred to as Buckeye Merchant Services Companies (BMSC). BMSC can borrow up to $500 million on the $1.5 billion revolver for letters of credit and swingline loans. In aggregate for all four borrowers, letters of credit cannot exceed $500 million and swing line loans cannot exceed $150 million.
The bank definition of leverage is adjusted for the covenant calculation. For the bank definition of debt, there are adjustments. The debt balance is reduced by borrowings of BMSC. The amount excluded is limited to 100% hedged eligible inventory and 75% of eligible accounts receivables. Like other MLP bank definitions for EBITDA, it is adjusted for acquisitions and material projects.
At the end of any quarter, bank defined leverage cannot exceed 5.0x. If in any quarter, there has been an acquisition of $50 million or more, or if acquisitions have been $100 million or more in the prior 12 months, then leverage cannot exceed 5.5x for four consecutive quarters. Given Buckeye's acquisition of the Buckeye Texas Partners acquisition in September 2014, Buckeye's maximum leverage was 5.5x through 2Q15, and it reverts to 5.0x in 3Q15.
The credit agreement states BMSC shall not be held jointly and severally liable for any obligations of Buckeye for the credit agreement or other debt.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Buckeye Partners, L.P.
--IDR at 'BBB-';
--Senior unsecured at 'BBB-'.
The Outlook is Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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