NEW YORK--()--Fitch Ratings has downgraded the ratings of NuStar Logistics, L.P. (Logistics) and NuStar Pipe Line Operating Partnership, L.P. (NPOP), the operating partnerships of NuStar Energy L.P. (NuStar), which is a publicly traded master limited partnership (MLP). The ratings are listed below. The Outlooks for Logistics and NPOP are Stable.
Fitch has taken the following rating actions:
--Long-term Issuer Default Rating (IDR) downgraded to 'BB' from 'BB+';
--Senior unsecured debt downgraded to 'BB' from 'BB+'.
--Long-term IDR downgraded to 'BB' from 'BB+';
--Senior unsecured debt downgraded to 'BB' from 'BB+'.
Approximately $1.6 billion of senior unsecured debt at the combined partnerships is affected by today's rating actions.
The downgrade to 'BB' reflects expectations for leverage to increase as a result of the company's announced acquisition of Eagle Ford assets for approximately $425 million. The assets are being acquired from TexStar Midstream Services LP and the transaction will occur in two phases. Both parts of the acquisition are expected to close by 1Q'13.
Additional investments in the assets are expected to be in the range of $400 to $500 million over the next 18 - 24 months. The company plans to fund the acquisition with revolver borrowings and with the future issuance of junior subordinated notes.
Fitch previously forecasted leverage defined as adjusted debt to adjusted EBITDA to be approximately 4.3x by the end of 2013. With the pending acquisition and expectations for significant capex, Fitch has revised its leverage forecast to be in the range of 4.8 to 5.0x by the end of 2013. This forecast is dependent on the structure of future note issuance and a significant increase in EBITDA in 2013 against 2012.
Ratings concerns center on high leverage metrics, the execution risks associated with the pending acquisition, and the significant increase in capex. Given NuStar's substantial investment in the pending transaction and the need for the company to make additional investments in its latest acquisition to realize its full earnings potential, Fitch believes there is increased risk that EBITDA growth may not meet expectations.
Factors which support the rating are NuStar's strong base of primarily fee-based and regulated pipeline, terminalling and storage assets. These assets accounted for 80% of segment EBITDA in 2011 and could increase to 90 - 95% by the end of 2013. The company sold 50% of its asphalt operations in 3Q'12 and plans to sell its San Antonio refinery. Other factors include expectations for significant growth in EBITDA in 2013 for the storage and transportation segments, and sizeable and geographically diverse assets.
As of Sept. 30, 2012 NuStar had $107 million of cash on the balance sheet. In addition, it had $1.1 billion of availability on its $1.5 billion revolver. The company's $1.5 billion revolving credit facility expires in 2017. Leverage as defined by the bank agreement is to be no greater than 5.0x for covenant compliance. However, if NuStar makes acquisitions which exceed $50 million, the bank defined leverage ratio increases to 5.5x from 5.0x for two consecutive quarters. NuStar has stated that leverage at the end of 3Q'12 was 4.3x as defined by the bank agreement. Fitch expects that NuStar will be covenant compliant going forward.
In December 2012, the 21 million UK 6.65% term loan is due. In 2013, $230 million of notes are due in March and $250 million are due in June.
Capital expenditures have been increasing. In 2011, capex was $336 million. NuStar has stated that in 2012, strategic capex is projected to be around $400 million and reliability capex is to be $45 million to $50 million. With the pending acquisition of the TexStar assets and plans to invest significantly in the assets, Fitch expects capital expenditures to again increase in 2013.
Logistics and NPOP are wholly owned subsidiaries of NuStar. NuStar guarantees the debt of Logistics and NPOP, and the debt instruments for the two operating partnerships have cross defaults and cross guarantees which closely link the ratings.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Significant leverage reduction. Should leverage fall below 4.5x 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:
--Further deterioration of EBITDA;
--Inability to meet growth expectations associated with the pending acquisition given the substantial investment;
--Significant increases in capital spending beyond Fitch's expectations or further acquisition activity which have negative consequences for the credit profile;
--Increased leverage beyond 5.5x for a sustained period of time.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT Credit Analysis' (Dec. 15, 2012);
--'Marcellus Shale Report: Midstream and Pipeline Sector Challenges and Opportunities' (June 10, 2012);
--'Top Ten Questions Asked by Pipeline, Midstream, and MLP Investors' (May 1, 2012);
--'Master Limited Partnerships 101'(Nov. 1, 2011);
--'Natural Gas Pipelines: Hot Topics' (Oct. 13, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
Marcellus Shale Report: Midstream and Pipeline Sector -- Challenges/Opportunities
Top Ten Questions Asked by Pipeline, Midstream and MLP Investors
Master Limited Partnerships 101
Natural Gas Pipelines: Hot Topics -- Long-Term Trends Affecting Pipeline Risk