Moody's changes Martin Midstream's outlook to positive; affirms B2 CFR
26 Jul 2018
Approximately $374 million of rated debt affected
New York, July 26, 2018 -- Moody's Investors Service ("Moody's") changed Martin Midstream Partners L.P.'s (Martin Midstream) rating outlook to positive from stable and affirmed its Corporate Family Rating (CFR) at B2, its Probability of Default Rating (PDR) at B2-PD, and its senior unsecured notes rating at Caa1. Concurrently, Moody's affirmed Martin Midstream's Speculative Grade Liquidity (SGL) rating of SGL-3.
The change in outlook follows Martin Midstream's announcement that it will sell its 20% non-operating interest in West Texas LPG Pipeline L.P. (WTLPG) for $195 million and apply the proceeds towards repayment of revolver borrowings. Martin Midstream's positive rating outlook reflects its reduced financial leverage achieved through this transaction and Moody's expectation for improvement in distribution coverage in 2019. Both Martin Midstream and Martin Resource Management Corporation have their own financing and capital needs, and entail the expectation of increasing distributions. Therefore, tempering upward rating movement are organic growth constraints and risks of re-leveraging as the partnership needs capital to reinvest in its business or make acquisitions to grow EBITDA and distributable cash flow.
Outlook Actions:
..Issuer: Martin Midstream Partners L.P.
....Outlook, Changed To Positive From Stable
Affirmations:
..Issuer: Martin Midstream Partners L.P.
.... Probability of Default Rating, Affirmed B2-PD
.... Speculative Grade Liquidity Rating, Affirmed SGL-3
.... Corporate Family Rating, Affirmed B2
....Senior Unsecured Regular Bond/Debenture, Affirmed Caa1 (LGD5)
RATINGS RATIONALE
Martin Midstream's B2 CFR broadly reflects the partnership's small scale, complex business structure from a broad array of operations, and geographic concentration in the US Gulf Coast. The partnership benefits from a foundation of fee-based cash flows, a portfolio of midstream service offerings in an integrated system, and Moody's expectation for continued support from Martin Resource Management Corporation. Relative to much larger midstream businesses with greater financial resources, Martin Midstream is more susceptible to cyclical downturns and financial market disruptions, has more limited liquidity, and less access to capital markets—a particularly important source of funding given that excess cash flows are distributed to owners.
The credit profile is supported by the roughly 60% of EBITDA represented by contracts that are fee-based though this figure has decreased as the partnership's butane business has grown. Earnings power in the partnership's natural gas service segment is adversely impacted by lower rates on contracts that come up for renewal due to the lower price of the commodity relative to when prior contracts were executed. Concentration in the US Gulf Coast results in exposure to regional circumstances and subjects operations to the adverse impact of weather conditions such as hurricanes, which weighed on results in 2017. However, its location also positions the partnership well to serve the oil refining industry which are large customers for certain of its services. The partnership also has the specialized ability to store and transport hard-to-handle products across its integrated portfolio of services.
Pro forma for the asset sale and repayment of revolver borrowings, debt/EBITDA as of March 31, 2018 measures about 4.1x which is down meaningfully from 5.2x. Moody's expects leverage will climb modestly during the remainder of 2018 including through the seasonally weaker third quarter which tends to have weaker cash flows attributable in particular to the partnership's NGL business. As a result of the sale of its stake in WTLPG and elimination of its associated share of spending for an expansion project amounting to $24 million for the remainder of 2018, the partnership will reduce capital expenditure needs thereby benefiting cash flows. However, distribution coverage will likely remain pressured at least through the third quarter of 2018 as a result of certain non-discretionary maintenance capital expenditure needs during the year.
The SGL-3 liquidity rating reflects Moody's expectation that Martin Midstream will maintain adequate liquidity over the next 12 months. The partnership does not maintain a meaningful amount of cash on its balance sheet given that its partnership agreement calls for distribution of available cash. As of June 30, 2018 and pro forma for the repayment of revolver borrowings with proceeds from the asset sale, the partnership would have about $270 million drawn under its $664 million revolver due March 2020 though financial covenants could limit access to less than the full facility amount. Moody's anticipates that revolver borrowings will increase during the seasonally weaker third quarter of 2018 including to fund working capital needs.
Factors that could lead to an upgrade include EBITDA growth and increased scale without meaningfully increasing business risk while maintaining adequate liquidity, distribution coverage sustained above 1.1x (measured as funds from operations less maintenance capital expenditures divided by distributions), and debt/EBITDA sustained below 5x.
Factors that could lead to a downgrade include debt/EBITDA approaching 6x, distribution coverage falling meaningfully below 1x or deterioration in liquidity.
The principal methodology used in these ratings was Midstream Energy published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Martin Midstream, headquartered in Kilgore, Texas, is a publicly-traded master limited partnership with primary operations in the United States Gulf Coast region. Martin Resource Management Corporation has a 51% voting interest in Martin Midstream's general partner with the other 49% voting interest held by Alinda Capital Partners. Revenue for the 12 months ended March 31, 2018 was $978 million.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Jonathan Teitel, CFA
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
Peter Speer
Senior Vice President
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
