NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Buckeye Partners, LP's (BPL) issuance of $600 million in senior unsecured notes due 2026. Proceeds are expected to fund a portion of the purchase price of the VTTI acquisition announced earlier this week.
If the pending acquisition is not consummated, or the purchase agreement is terminated, BPL will be required to redeem all of the notes then outstanding at 101% of the principal amount of the offering, plus accrued and unpaid interest.
BPL's ratings were affirmed on Tuesday October 26 with a Stable Outlook following the Monday announcement that BPL would acquire a 50% interest in VTTI B.V. (VTTI) for $1.15 billion from Vitol, funded with a balanced mix of debt and equity. BPL has already completed the majority of the equity funding for the transaction. VTTI is one of the largest independent global marine terminal businesses which, through its subsidiaries and partnership interests, owns and operates approximately 54 million barrels of petroleum products storage across 13 terminals located on five continents. These marine terminals are predominately located in key global energy hubs, including Northwest Europe, the United Arab Emirates, and Singapore. The terminal cash flows are largely supported by take-or-pay storage agreements with Vitol. This transaction, which is subject to regulatory approvals and customary closing conditions, is expected to close in early January 2017.
Fitch believes the acquisition to be modestly positive for BPL from a strategic perspective, providing BPL a sizeable entry into global crude and refined product hubs in Asia, the Middle East and Europe. The acquisition provides BPL an interest in an existing global terminal network with hard to replicate assets/operations with multiple access capabilities, as well as a platform for future growth.
Fitch views the acquisition as neutral to BPL's leverage profile; expectations are that BPL's credit metrics remain within Fitch's base case sensitivities though the transaction is mildly leveraging in the near term. Following the acquisition, Fitch expects leverage to be approximately 4.8x in 2017, trending down closer to 4.5x in outer years. This represents a slight increase in leverage from prior expectations of 4.1x to 4.5x for the same period, but still below our 5.0x or greater negative-rating trigger. Distribution coverage should remain above 1x for the forecast period.
KEY RATING DRIVERS
Size, Scale and Stability: Buckeye's 'BBB-' rating for the Issuer Default Rating (IDR) and senior unsecured debt is based on the partnership's size, geographic diversity, and ability to invest in growth opportunities that should create future increases in EBITDA and distributable cash flows. Past acquisitions and strategic growth capex initiatives have already driven EBITDA growth which has reduced the partnership's leverage (defined as debt to adjusted EBITDA) over the past few years. Buckeye estimates that approximately 95% of its EBITDA for the LTM ending June 30, 2016 came from fee-based activities, providing a fair amount of comfort around cash flow and earnings stability.
Asset Diversity: The ratings are also supported by geographically diverse assets which are located in the Gulf Coast, New York Harbor, Chicago, and the Caribbean. The recent acquisition adds assets in Northwest Europe, the United Arab Emirates and Singapore. The partnership also benefits from the 2010 acquisition of its general partner. Since that transaction, Buckeye no longer pays incentive distribution rights, which benefits the master limited partnership's (MLP) overall cost of capital.
Acquisitive Nature: Concerns include the partnership's acquisitive nature; however, Buckeye has historically demonstrated its ability to fund growth and acquisitions with a combination of debt and equity in order to manage the impact to BPL's balance sheet. Fitch notes that BPL will be structurally subordinate to roughly $800 million in non-recourse debt at VTTI and VTTI's publicly traded MLP, VTTI Energy Partners, LP. Fitch does not typically consolidate non-consolidated, non-recourse joint ventures. Instead, Fitch typically adjusts EBITDA for cash distributions received from any non-consolidated interests.
Leverage & Distribution Coverage: The VTTI acquisition is not expected to have a meaningful impact on leverage metrics or distribution coverage versus Fitch's previous expectations. Fitch expects pro-forma leverage of roughly 4.8x for 2017 following the acquisition, trending down closer to 4.5x in outer years. This represents a slight increase in leverage from prior expectations of 4.1x to 4.5x for the same period, but still below our 5x or greater negative-rating trigger. Distribution coverage should remain above 1x for the forecast period. The distribution coverage ratio is expected to remain in a range of 1.0x to 1.1x, which is adequate; however, if the coverage ratio falls below this range, then Fitch would be concerned about how the shortfall would be funded.
KEY ASSUMPTIONS
Fitch's key assumptions within the agency's rating case for the issuer include:
--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 in the range of 1.0x to 1.1x;
--Growth capex is in the range of $300 million to $330 million in 2016, in line with management's guidance;
--Maintenance capex modestly increases in each progressing year;
--$1.15 billion acquisition of VTTI is funded with 50% debt and 50% equity, and the closing occurs in January 2017.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Significant leverage reduction. Should leverage fall below 4x 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 growth expectations associated with expansion projects given the substantial investments in prior acquisitions;
--Significant increases in capex or acquisitions not funded in a balanced way;
--Increased adjusted leverage beyond 5x for a sustained period of time and distribution coverage below 1x.
LIQUIDITY
Liquidity Adequate: As of June 30, 2016, the partnership had $14.8 million of cash on the balance sheet. In addition, it had approximately $957.5 million of additional borrowing capacity on its $1.5 billion unsecured revolver due 2020. BPL's nearest debt maturity is 2017 when $125 million becomes due.
Borrowers on the revolver are Buckeye Partners, L.P. (BPL), 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 (LOCs) and swingline loans. In aggregate for all four borrowers, LOCs cannot exceed $500 million and swingline loans cannot exceed $150 million.
The bank definition of leverage is adjusted for the covenant calculations. For the bank definition of debt, there are adjustments. The debt balance is reduced by borrowings of BMSC subject to certain limitations. 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 5x. 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 three consecutive quarters.
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 rates BPL's offering of $600 million in senior unsecured notes due 2026 'BBB-.'
Fitch currently rates BPL as follows:
Buckeye Partners, L.P.
--Long-Term IDR 'BBB-';
--Senior unsecured debt 'BBB-'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: 25 October 2016
Summary of Financial Statement Adjustments - Fitch typically adjusts EBITDA for Master Limited Partnerships (MLP) like BPL to exclude equity in earnings of unconsolidated affiliates but include cash distributions from unconsolidated affiliates.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
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