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Rating Action: Moody's upgrades Martin Midstream's CFR to Caa1; outlook stable
Global Credit Research - 13 Aug 2020
New York, August 13, 2020 -- Moody's Investors Service ("Moody's") upgraded Martin Midstream Partners L.P.'s (MMLP) Corporate Family Rating (CFR) to Caa1 from Caa3, Probability of Default Rating (PDR) to Caa1-PD/LD (/LD appended) from Caa3-PD and Speculative Grade Liquidity (SGL) rating to SGL-3 from SGL-4. Moody's assigned a Caa1 rating to MMLP's senior secured 1.5 lien notes due 2024 and a Caa2 rating to MMLP's senior secured second lien notes due 2025. Moody's upgraded the rating of the remaining senior unsecured notes due 2021 to Caa3 from Ca. The outlook was changed to stable from negative.
"The upgrade of MMLP's ratings reflect the extended debt maturity profile and improved liquidity," said Jonathan Teitel, a Moody's analyst. "The partnership needs to address the remainder of the senior notes due February 2021 and that will lessen its available liquidity with some uncertainty regarding its future financial performance."
As part of the bond exchange, MMLP issued about $54 million of new 10% 1.5 lien notes due 2024 and about $292 million of 11.5% second lien notes due 2025. Approximately $29 million of senior unsecured notes due 2021 remain outstanding.
..Issuer: Martin Midstream Partners L.P.
.... Probability of Default Rating, Upgraded to Caa1-PD /LD from Caa3-PD
.... Speculative Grade Liquidity Rating, Upgraded to SGL-3 from SGL-4
.... Corporate Family Rating, Upgraded to Caa1 from Caa3
....Senior Unsecured Notes, Upgraded to Caa3 (LGD6) from Ca (LGD5)
..Issuer: Martin Midstream Partners L.P.
....Senior Secured Second Lien Notes, Assigned Caa2 (LGD5)
....Senior Secured 1.5 Lien Notes, Assigned Caa1 (LGD3)
..Issuer: Martin Midstream Partners L.P.
....Outlook, Changed To Stable From Negative
The appending of the PDR with an "/LD" designation indicates a limited default as a result of MMLP's exchange transaction with bondholders. Moody's considers this transaction as a distressed exchange and therefore a default under Moody's definitions. The LD designation will be removed shortly after this rating action.
MMLP's Caa1 CFR reflects the overhang of the remaining senior notes due February 2021 and risks to liquidity and future operating performance in an uncertain environment. MMLP is relatively small and faces challenges to growth from liquidity constraints. Relative to much larger midstream businesses with greater financial resources, it is more susceptible to cyclical downturns and financial market disruptions. MMLP's debt maturity profile is improved as a result of the exchange transaction, but the partnership has slightly more debt outstanding and a higher interest burden because the new bonds carry higher coupons than the senior notes due 2021. Liquidity constraints and need for debt reduction will temper growth.
While small in the midstream sector, MMLP is diversified for its size and has long-standing customer relationships. A majority of MMLP's EBITDA is derived from fee-based contracts partially mitigating commodity price risk though volume risks remain. MMLP's focus on the US Gulf Coast results in concentrated exposure to regional circumstances but also positions the partnership well to serve oil refiners which are large customers.
The SGL-3 rating reflects Moody's view that MMLP has adequate liquidity. However, liquidity could tighten with the maturity of the remaining $29 million of senior notes due February 2021. The revolver could be used to repay these senior notes so long as afterwards, 20% of aggregate revolver commitments remain available (equal to $60 million now but revolver commitments could decrease by up to $25 million if there are asset sales) and first lien revolver leverage is less than 2x. Further, MMLP would need to repay these borrowings within twelve months. The requisite conditions could lead to an amendment and/or waiver being needed. Moody's anticipates that MMLP's available borrowing capacity will be constrained by financial covenants and that MMLP may need to seek covenant relief. As of June 30, 2020, MMLP had $181 million drawn on its $300 million revolver due August 2023 and $22 million in letters of credit outstanding. While leverage is above 3.75x, MMLP has to use at least 25% of excess cash flow each year to make an offer to redeem second lien notes at par.
MMLP's 1.5 lien notes due 2024 are rated Caa1 and the second lien notes are rated Caa2. The revolver (unrated) has a first lien on the collateral. The remaining senior unsecured notes due 2021 are rated Caa3, reflecting effective subordination to all of the secured debt instruments.
The stable outlook reflects Moody's expectation for MMLP to modestly grow EBITDA in 2021 and maintain adequate liquidity through repaying the remaining senior notes due February 2021.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to a downgrade include EBITDA/interest below 2x; weakening liquidity; or increasing risk of default.
Factors that could lead to an upgrade include EBITDA growth and correspondingly lower leverage; EBITDA/interest above 2.5x; and sustained adequate liquidity.
MMLP, headquartered in Kilgore, Texas, is a publicly traded master limited partnership with primary operations in the US Gulf Coast region.
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.
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.
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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Jonathan Teitel, CFA Asst Vice President - 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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