NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed LOOP LLC's ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB+';
--First-stage deepwater port revenue bonds and refunding revenue bonds (first-stage debt) at 'A-';
--Deepwater port refunding revenue bonds (unsecured debt) at 'BBB+';
--Senior unsecured debt at 'BBB+';
--Short-term IDR at 'F2'.
Fitch has also affirmed and withdrawn its 'F2' rating for commercial paper since LOOP does not utilize commercial paper. Approximately $243 million of first-stage debt and $153 million of unsecured debt is affected by this rating action. The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings are supported by LOOP's strategic position as the only deep-water port in the U.S. capable of offloading ultra-large crude carriers and very large crude carriers that are too large to access inland port facilities. It is also well positioned to receive domestic crudes delivered by medium range tankers. Crude oil storage has been an increased focus and new expansions should modestly benefit EBITDA. The ratings are further supported by expectations that LOOP's owners will continue to demonstrate support with financial flexibility for distributions. LOOP's owners are U.S. subsidiaries of Royal Dutch Shell plc (46.1%; IDR 'AA', Rating Watch Negative), affiliates of Marathon Petroleum Corp. (50.7%; IDR 'BBB', Outlook Stable), and affiliates of Valero Corp. (3.2%; IDR 'BBB', Outlook Stable).
In addition, the ratings consider LOOP's strategically located assets in the Gulf Coast. In 2014, LOOP imported 6.5% of all crude imports into the U.S. While significant, volumes have fallen from 10.4% of crude imports in 2012. However, the company has assets well positioned to handle domestic crudes arriving by medium range tankers and by pipeline. Those volumes have been increasing over the last few years and Fitch expects domestic volumes to continue to rise. Furthermore, LOOP should benefit from better results from existing crude storage assets as well as storage expansion projects.
Rating concerns center on expectations for modestly lower EBITDA which is expected as a result of lower throughput volumes over the next couple of years. Gulf Coast crude oil imports have been unfavorably impacted by the North American shale revolution, which has sharply raised the availability of discounted Canadian and interior shale crude oils into the Midwest and the Gulf Coast, in turn displacing the need for waterborne imports transported through LOOP facilities.
Fitch is also concerned about the potential for the Capline pipeline to reverse its flows. Capline currently moves crude north from Louisiana to Illinois. Owners of Capline have contemplated moving Canadian crude south to refiners in the Gulf Coast for some time and it is unknown if a reversal would occur. If it did, it could impact volumes for LOOP. Capline is an underutilized crude pipeline with capacity of 1.2 million barrels per day.
First-Stage Debt
The 'A-' rating for the first-stage debt reflects the benefits stemming from the right these bondholders have to receive payments under T&D agreements with LOOP's owners. The T&D obligors are required to ship or cause to be shipped enough oil to enable LOOP to meet its operating expenses and debt service on all first-stage debt according to their pro rata share of ownership. Alternatively, the owners severally agree to make cash payments to LOOP for any deficiency in meeting these obligations in exchange for a credit for future throughput. In addition, a portion of the first-stage debt is backed by irrevocable letters of credit which provides additional credit enhancement to specific tranches.
Unsecured Debt
While LOOP's 'BBB+' unsecured debt ranks pari passu with first-stage debt, it does not share in the additional credit enhancement provided by the T&D agreements. However, Fitch expects that throughput volumes from non-owner shippers will continue to provide sufficient cash flow to support LOOP's non-T&D backed debt. In 2014, third party volumes accounted for 21% of import throughputs. Import throughputs accounted for 56% of LOOP's overall throughput.
Leverage
Leverage for the latest 12 months (LTM) ending June 30, 2015 was 4.0x, up from 3.4x at year-end of 2014. The increase is attributed to a slight decline in EBITDA while debt was unchanged. Importantly, LOOP's leverage has improved significantly since year-end 2013 when it was 5.4x as a result of weak EBITDA. Fitch does not expect leverage to return such high levels. For year-end 2015, Fitch expects leverage to be in the range of 3.6x to 3.8x.
KEY ASSUMPTIONS
--Fitch forecasts lower volumes of imported crude. Domestic volumes are projected to increase and expected to offset lost import volumes.
--EBITDA margins in the forecast period of 2015 to 2018 are forecasted to be between 40% and 44%, well below margins of 48% as seen in 2014.
--Dividends to owners are expected to fluctuate based on LOOP's cash flows. Fitch assumes that past dividend flexibility will continue.
--Capex is expected to peak in 2015 followed by more normalized levels of approximately $30 million.
--Leverage is projected to be in the range of 3.6x to 3.8x at the end of 2015. With expectations for lower EBITDA in 2016, Fitch forecasts leverage in the range of 3.8x to 4.2x at the end of 2016. Leverage is forecasted to decline beyond 2016.
--No assumptions are made for Capline potentially reversing crude flows to the north. A reversal of Capline is expected to hurt LOOP's results.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Significant leverage reduction along with stable throughput volumes. Should leverage fall below 3.5x for 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:
--Deterioration in the underlying credit quality of LOOP's T&D obligors or unfavorable revisions in T&D support agreements;
--A shift in crude transportation dynamics which permanently reduces throughput volumes;
--Increased leverage beyond 4.25x for a sustained period of time.
LIQUIDITY
As of the end of June 30, 2015, LOOP had $62 million of cash on the balance sheet. In addition, it has a $50 million revolver which extends until December 2017. In October 2015, $40 million of T&D bonds come due. LOOP has the ability to remarket these notes. Fitch notes that the dividend payable to LOOP's owners is discretionary and enhances the company's liquidity.
FULL LIST OF RATING ACTIONS
LOOP LLC
--Long-term Issuer Default Rating (IDR) affirmed at 'BBB+';
--First-stage deepwater port revenue bonds and refunding revenue bonds (first-stage debt) affirmed at 'A-';
--Deepwater port refunding revenue bonds (unsecured debt) affirmed at 'BBB+';
--Senior unsecured debt affirmed at 'BBB+';
--Short-term IDR affirmed at 'F2';
--Commercial paper affirmed at 'F2' and withdrawn.
The Rating 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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