Rating Action: Moody’s downgrades NGL Energy’s notes to B3, changes outlook to negative
Global Credit Research – 13 Aug 2020
Approximately $1.4 billion of rated debt affected
New York, August 13, 2020 — Moody’s Investors Service (“Moody’s”) downgraded NGL Energy Partners LP’s (NGLEP) senior unsecured notes to B3 from B2 and changed the company’s rating outlook to negative from stable. Moody’s concurrently affirmed NGLEP’s B1 Corporate Family Rating (CFR) and B1-PD Probability of Default Rating (PDR). The SGL-3 Speculative Grade Liquidity Rating remained unchanged.
“The company will face elevated counterparty risks, increased uncertainty around crude and water volumes and high financial leverage through 2021”, said Sajjad Alam, Moody’s Senior Analyst. “The coronavirus pandemic has triggered a collapse in crude oil prices, sharply reduced upstream activity and created a challenging refinancing environment for NGL.”
Issuer: NGL Energy Partners LP
Senior Unsecured Regular Bond/Debenture, Downgraded to B3 (LGD5) from B2 (LGD5)
Corporate Family Rating, Affirmed B1
Probability of Default Rating, Affirmed B1-PD
Speculative Grade Liquidity Rating, SGL-3
Changed to Negative from Stable
The unsecured notes were downgraded because of the increased proportion of secured debt in NGLEP’s capital structure. The company has borrowed more under its secured credit facilities in recent quarters and Moody’s believes it is unlikely that will be reversed in the near to medium term. The unsecured notes have a subordinated claim to NGLEP’s assets behind the combined $1.915 billion secured revolving credit facilities and the $250 million secured term loan.
NGLEP’s B1 CFR reflects its high financial leverage, heightened volume risks based on reduced US drilling activity, and the bankruptcy of its largest shipper on the Grand Mesa Pipeline. Moody’s projects a likely drop in volumes and margins in the crude logistics segment will adversely impact NGLEP’s overall earnings and leverage despite producing growth in the water solutions segment. Low commodity prices and tight capital market conditions have raised the company’s cost of capital. To navigate weak industry conditions and live within cash flow, management has significantly reduced capital expenditures and dividends. NGLEP’s primary strengths include its significant scale, diversified midstream operations across several key US hydrocarbon basins and increasing fee-based cash flow from its large water services business in the Permian Basin.
NGLEP should have adequate liquidity well into 2021, which is captured in the SGL-3 rating. Moody’s expects a modest amount of free cash flow in fiscal 2021 and minimal use of the revolving credit facilities. The revolving facilities are heavily drawn today, have limited covenant cushion, and will mature in October 2021. As of June 30, 2020, the company had $1.658 billion in aggregate borrowings and $85.2 million in posted LCs, leaving roughly $172 million of availability under its combined $1.915 billion commitments. In terms of financial covenants governing the credit agreement, the total leverage covenant has the least compliance headroom and could get breached if earnings fall more materially than expected. The partnership’s alternate liquidity is limited given substantially all its assets are encumbered.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today’s action reflects, in part, the impact on NGLEP of the deterioration in credit quality it has triggered, given its exposure to reduced upstream activity and low oil prices, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
The negative outlook reflects NGLEP’s high leverage, uncertain volume outlook, tight liquidity and a challenging industry backdrop.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
NGLEP’s ratings could be downgraded if leverage rises above 6x, if the company generates large negative free cash flow, or if its liquidity worsens. The ratings could be upgraded if leverage is sustained below 5x and distribution coverage is sustained above 1.2x.
The principal methodology used in these ratings was Midstream Energy published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
NGL Energy Partners LP is a diversified midstream Master Limited Partnership headquartered in Tulsa, Oklahoma.
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
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Sajjad Alam Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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