NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned NGL Energy Partners, LP (NGL) $400 million issuance of senior unsecured notes due 2023 a 'B-' rating. The Recovery Rating is 'RR6'. The notes are being co-issued by NGL and NGL Energy Finance Corp. Proceeds are expected to be used to repay borrowings under NGL's secured credit facility.
The ratings consider the relatively high leverage of the partnership, as well as the structural subordination that NGL's unsecured notes have to its large senior secured borrowings. Thus, Fitch notches NGL's senior unsecured debt rating two notches down from NGL's 'B+' Issuer Default Rating (IDR), at 'B-'/'RR6', indicating poor recovery prospects at the unsecured level in the event of a default given higher expected recovery at the secured level.
Fitch notes that NGL has been making progress with regard to managing its leverage, raising needed capital, and completing and reducing its capital spending backlog. In April 2016, NGL completed the sale of its general partnership and limited partnership interest in TransMontaigne Energy Partners, LP (TransMontaigne). Additionally, NGL recently completed the issuance of $240 million of preferred equity (which Fitch gives 50% equity treatment) and has made significant progress on completing its Grand Mesa Pipeline project, which is expected in-service in November 2016. NGL's growth spending for FY2017 (ends March 31) has been scaled back and is expected to be in the range of $200 million to $300 million, which is viewed as reasonable given Fitch's expectations for liquidity.
Important to note is that NGL has reduced FY2017's distributions by 39%, which should improve the distribution coverage ratio significantly. Fitch believes this progression should benefit the partnership in the near- to intermediate-term and NGL should experience credit metric strengthening in FY2017.
KEY RATING DRIVERS
Diverse Operations: NGL's ratings reflect its diverse assets located throughout the U.S. The partnership has significantly expanded in size and scale since its IPO in 2011. NGL's assets are diverse and consist of liquids (approximately 22% of EBITDA excluding G&A for FY2016), crude oil logistics (14%), water solutions (16%), retail propane (18%), and refined fuels and renewables (30%). NGL's strategy is to focus growth spending on crude oil logistics, liquids, retail propane and refined fuels and renewables.
High Leverage: For the latest-12-months (LTM) ending June 30, 2016, NGL's adjusted leverage (as defined by Fitch as debt/Adjusted EBITDA, whereby debt includes NGL's borrowings under its working capital facility, and EBITDA excludes equity in earnings, but includes distributions from non-consolidated affiliates and excludes gain on asset sales) was just over 7.0x. Given Grand Mesa's in-service date of Nov. 1, 2016 and expectations for normalized weather for the propane business in FY2017, Fitch projects adjusted leverage to improve to within the range of 5.4x-5.8x by the end of FY2017.
Distributable Cash Flow and Distribution Coverage: For the LTM ending June 30, 2016, distributable cash flow was $252 million, down from $276 million generated during FY2016. NGL's distribution coverage ratio was 0.9x for the LTM ending June 30, 2016. With the 39% cut in distribution in FY2017, Fitch expects the coverage ratio to be in the range of 1.8x to 2.0x by year-end FY2017 (March 2017).
Fitch's key assumptions within the rating case for NGL include:
--EBITDA growth occurs in FY2017 due to projects coming on line, particularly Grand Mesa;
--Grand Mesa completed and operational starting Nov. 1, 2016 with EBITDA in line with NGL's guidance of $120 million in year one.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Leverage at or below 5.5x on a sustained basis;
--Fee-based arrangements accounting for greater than 60% of cash flows;
--A demonstrated sustainable ability to access capital markets for liquidity needs.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Significant increases in capital spending beyond Fitch's expectations or further acquisition activity that have negative consequences for the credit profile (e.g. if not funded with a balance of debt and equity);
--Increased adjusted leverage beyond 6.5x for a sustained period of time;
--Distribution coverage below 1x for a sustained period of time.
As of June 30, 2016, NGL had $10 million of cash on the balance sheet. It also had a $2.484 billion secured bank facility comprising a $1.038 billion working capital facility (which is restricted by a borrowing base) and a $1.446 billion expansion facility. The working capital facility had borrowings of $655.5 million and letters of credit totalling $71.6 million. The expansion facility had drawn $1.172 billion, leaving capacity of $274 million. NGL's bank agreement extends through November 2018.
In addition to the bank agreement having borrowing base restrictions on the working capital revolver, financial covenants do not allow leverage (as defined by the bank agreement) to exceed 4.75x or allow interest coverage to be below 2.75x. As of June 30, 2016 NGL was in compliance with its covenants, with leverage of 4.0x and interest coverage of 4.7x.
In addition to the working capital borrowings and letters of credit being excluded from the leverage calculation, NGL gets pro forma EBITDA credit for acquisitions. Pro forma EBITDA credit for material projects or acquisitions is typical for MLP bank agreements.
NGL does not have any significant debt maturities until 2018 when the bank agreement expires. After that, it has $383.5 million of notes due in 2019.
FULL LIST OF RATING ACTIONS
Fitch currently rates NGL as follows:
NGL Energy Partners LP
--Long-Term IDR at 'B+';
--Senior unsecured debt at 'B-'/'RR6'.
NGL Energy Finance Corp.
--Senior unsecured debt at 'B-'/'RR6'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: April 29, 2016
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are outlined below:
--Adjusted leverage has been used to account for NGL's past ownership of TransMontaigne (the general partner and limited partnership stake). Historical adjusted debt at NGL was reduced by TransMontaigne's debt. Historical adjusted EBITDA accounted for NGL's stake in TransMontaigne.
--Adjusted EBITDA typically excludes equity in earnings from unconsolidated affiliates, but includes cash distributions from unconsolidated affiliates.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
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