Rating Action: Moody's upgrades Antero Midstream's notes to Ba3, affirms Ba2 CFR
20 Feb 2019
Approximately $600 million of new notes rated
New York, February 20, 2019 -- Moody's Investors Service ("Moody's") upgraded Antero Midstream Partners LP's (AM) 5.375% senior unsecured notes to Ba3 from B1 and concurrently assigned a Ba3 rating to the company's proposed $600 million senior unsecured notes. Moody's also affirmed the company's Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default Rating (PDR), and SGL-3 Speculative Grade Liquidity Rating. The rating outlook remains positive.
"The upgrade of the notes reflects an increased proportion of unsecured debt in AM's capital structure following the issuance of the proposed unsecured notes pursuant to the simplification transaction," said Sajjad Alam, Moody's senior analyst.
Upgrades:
..Issuer: Antero Midstream Partners LP
...5.375% senior unsecured notes due 2024, Upgraded to Ba3 (LGD5) from B1 (LGD5)
Assignments:
..Issuer: Antero Midstream Partners LP
....Proposed senior unsecured notes due 2027, Assigned Ba3 (LGD5)
Affirmations:
..Issuer: Antero Midstream Partners LP
.... Probability of Default Rating, Affirmed Ba2-PD
.... Speculative Grade Liquidity Rating, Affirmed SGL-3
.... Corporate Family Rating, Affirmed Ba2
Outlook Actions:
..Issuer: Antero Midstream Partners LP
....Outlook, Remains Positive
RATINGS RATIONALE
With the new debt offering, AM will be able to free up revolver availability to comfortably fund the roughly $600 million cash portion of the simplification transaction that is expected to close in March 2019. The acquisition of AM by its general partner Antero Midstream GP (AMGP, unrated) will add $600 million of incremental debt increasing the debt/EBITDA ratio of the combined entity to 3.2x from AM's 2.4x level at December 31, 2018. However, the transaction will also simplify the corporate structure, and reduce future distribution burden as well as the cost of capital by eliminating incentive distribution rights, partially offsetting the negative impacts of higher leverage.
The unsecured notes are rated Ba3, one notch below AM's Ba2 CFR under Moody's Loss Given Default Methodology. This is because of the still significant size of AM's secured revolving credit facility, which has a $2 billion commitment amount and matures on October 26, 2022, relative to the amount of senior notes outstanding. The revolver has an all-asset pledge and has a priority-claim to all of the partnership's assets. Prior to the issuance of the new notes, the 5.375% senior unsecured notes were rated B1, or two notches beneath the Ba2 CFR, because the outstanding debt was so predominantly secured vs. unsecured.
AM's Ba2 CFR reflects its increased but still manageable financial leverage, excellent organic growth prospects, solid distribution coverage as well as its strategic and operational importance to Antero Resources. AM has long term fee-based gathering, compression and water handling contracts with Antero, and substantially all of Antero's current as well as all future acreage in West Virginia, Pennsylvania and Ohio has been dedicated to AM. Antero is one of the most active E&P operators in Appalachia where it expects to grow production at around a 15% annual rate over the next several years backed by strong natural gas hedge positions. The rating is constrained by AM's reliance on a single customer, narrow geographic focus in Appalachia, exposure to volatile drilling cycles, and significant future growth capital requirements, including $800 million through 2022 for the newly formed processing and fractionation Joint Venture (J-V) with MPLX LP (Baa3 stable). Moody's believes Antero's senior management will continue to influence AM's future growth strategy through their significant ownership interest in AM following the simplification transaction. Given its overriding reliance on Antero, AM is unlikely to be rated above Antero's rating without significantly greater customer, geographic and business diversification.
AM's SGL-3 rating reflects adequate liquidity through early-2020. The partnership will spend heavily to keep pace with Antero's projected growth and to fund AM's fractionation and processing J-V program with MPLX, significantly outspending its operating cash flow over the next two years. Moody's expects the projected funding gap to be financed with a balanced mix of debt and retained cash flow. Pro forma for the notes offering and the cash payments involving the simplification transaction, AM would have $1 billion of availability on the revolver as of December 31, 2018. Moody's expects AM to continue to term out revolver borrowings with unsecured debt to maintain a substantial liquidity cushion as growth spending continues through 2020.
AM's positive outlook reflects Antero's positive outlook and Moody's expectation of increasing earnings and declining leverage through 2020. Greater scale and diversification supportive of a higher rating level will be a key driver for any potential upgrade. An upgrade would also depend on Antero's CFR moving to a higher rating level. If Antero was upgraded, Moody's could consider upgrading AM if the partnership is able to maintain its debt to EBITDA ratio below 3x and its distribution coverage ratio (FFO -- Maintenance capex / Distributions) above 1.1x. The CFR could be downgraded if leverage approaches 4x, the distribution coverage falls below 1x or Antero's CFR is downgraded.
The principal methodology used in these ratings was Midstream Energy published in December 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Antero Midstream Partners LP is a Denver, Colorado based publicly traded MLP with gathering, compression, and water handling and treatment assets in northwest West Virginia and southern Ohio.
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