Fitch: US Midstream Sector Faces Capital Market Access Challenge

NEW YORK--()--US midstream companies' capital market access remains a prominent concern due to continued growing equity price weakness and as a potential increase in interest rates looms, according to Fitch Ratings.

With equity prices falling dramatically year-to-date in sympathy with lower commodity prices, decreased expectations for growth and a general rotation out of energy investments, the ability of issuers to access capital markets to fund growth spending with equity at reasonable prices is limited.

The Alerian MLP index is trading down roughly 35% year to date (through Nov. 30) and continuing to fall, with few near-term catalysts on the horizon to support a turnaround. With a potential U.S. Federal Reserve rate hike a real possibility in the very near term, higher cost of capital has the potential to create even greater hurdle rates for projects and acquisitions to be profitable. This could result in projects being pushed out or canceled, further pressuring capital pricing.

Ideal funding for midstream names is generally balanced between debt and equity issuance. With equity yields at or near multiyear highs, the ability and willingness of issuers to fund capital needs with equity is being called into question. This has the potential to further stress balance sheets as issuers borrow to meet funding needs. Equity and debt issuance for the first half of the year was relatively strong, but recent activity has slowed dramatically and is expected to remain muted in the near term.

As a result, Fitch expects issuers to explore other options to meet funding needs. Alternatives include asset sales, preferred equity, convertibles, or hybrid-subordinated debt. Other options to preserve cash include a further slowing of distributions. Many of these options will likely be pursued as issuers look to fund capital needs with whatever makes the most economic sense from a long-term cost-of-capital perspective, although indications are that some options may currently be limited.

The recent performance of a preferred equity issuance by Kinder Morgan, Inc. (KMI) has been poor, which could limit investor appetite for future hybrid issuance and the ability of issuers to follow KMI's lead in pursuing hybrid-like issuances. Cuts in distribution growth rates may continue as issuers choose instead to retain cash as a cushion increasing distribution coverage. Fitch would tend to view higher distribution coverage and cash retention to fund capital needs as a mild credit positive.

For more information on this topic, please see our special report titled, "What Investors Want to Know: U.S. Midstream, Pipelines and MLPs," which is available on our website at www.fitchratings.com

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Peter Molica
Senior Director
U.S. Corporates -- Midstream Energy
Fitch Ratings
+1 212-908-0288
33 Whitehall Street
New York, NY
or
Kathleen Connelly
Director
U.S. Corporates -- Midstream Energy
+1 212-908-0290
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Peter Molica
Senior Director
U.S. Corporates -- Midstream Energy
Fitch Ratings
+1 212-908-0288
33 Whitehall Street
New York, NY
or
Kathleen Connelly
Director
U.S. Corporates -- Midstream Energy
+1 212-908-0290
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com