St. James (Parish of) LA -- Moody's downgrades NuStar to Ba3, negative outlook
Rating Action: Moody's downgrades NuStar to Ba3, negative outlook
Global Credit Research - 26 Aug 2020
New York, August 26, 2020 -- Moody's Investors Service, ("Moody's") has downgraded the ratings of NuStar Energy L.P. (NuStar) and NuStar Logistics L.P. (NuStar Logistics), including the Corporate Family Rating (CFR) to Ba3 from Ba2, Probability of Default rating to Ba3-PD from Ba2-PD and ratings of senior unsecured notes to Ba3 from Ba2. The ratings of NuStar Logistics' subordinated notes and the ratings of preferred units issued at NuStar were downgraded to B2 from B1. Concurrently, Moody's upgraded NuStar's Speculative Grade liquidity Rating to SGL-3 from SGL-4. The outlook on all ratings is negative.
The action concludes the review of the ratings for downgrade initiated on April 13, 2020.
"The downgrade of the ratings reflects Moody's expectation that NuStar will need to reduce the absolute amount of its debt and high-cost preferred capital, to support its credit profile amid slow growth. Moody's does not expect NuStar to generate significant free cash flow to repay debt, but the company retains significant flexibility to further reduce distributions or raise capital through asset monetization over time," said Elena Nadtotchi, Moody's Senior Credit Officer.
Downgrades:
..Issuer: NuStar Energy L.P.
.... Probability of Default Rating, Downgraded to Ba3-PD from Ba2-PD
.... Corporate Family Rating, Downgraded to Ba3 from Ba2
....Pref. Stock Preferred Stock, Downgraded to B2 (LGD6) from B1 (LGD6)
..Issuer: NuStar Logistics, L.P.
....Subordinate Notes, Downgraded to B2 (LGD6) from B1 (LGD6)
....Senior Unsecured Notes, Downgraded to Ba3 (LGD3) from Ba2 (LGD3)
..Issuer: St. James (Parish of) LA
....Senior Unsecured Revenue Bonds, Downgraded to Ba3 from Ba2
Upgrades:
..Issuer: NuStar Energy L.P.
.... Speculative Grade Liquidity Rating, Upgraded to SGL-3 from SGL-4
Outlook Actions:
..Issuer: NuStar Energy L.P.
....Outlook, Changed To Negative From Rating Under Review
..Issuer: NuStar Logistics, L.P.
....Outlook, Changed To Negative From Rating Under Review
RATINGS RATIONALE
The downgrade of the CFR to Ba3 reflects Moody's expectation that in the near term NuStar will not generate significant free cash flow and will need to make divestments to reduce debt. NuStar benefits from an extensive and diversified portfolio of assets, but any divestments will likely take some time because the company needs to achieve higher valuations to enable deleveraging.
Prior year growth investments and an enlarged revenue base should help NuStar to mitigate a decline in earnings in 2020, caused by reduced activity in refining and E&P sectors amid economic lockdowns. Slower growth in earnings from NuStar's new assets, including from its recently completed Permian Crude system, will delay organic deleveraging beyond 2020-21.
While NuStar reduced its shareholder distributions, its free cash flow generation remains constrained by the significant cash payments on common and preferred units, as well as its relatively high cash cost of debt. In 2017-2019, NuStar generated significant negative free cash flow and had to make divestments to help fund operating deficits. In 2020, NuStar cut capital investment and should cover most of payments on capital and investment from its operating cash flow.
At the end of June 2020, NuStar's adjusted debt stood at $3.4 billion, with a further $1.4 billion outstanding in preferred securities, that Moody's excludes from the calculation of debt and leverage metrics. Moody's expects NuStar's leverage to exceed 5x debt/EBITDA in 2020-21 and to recover slowly in step with growth in earnings.
The negative outlook on the ratings reflects significant annual refinancing requirements and high execution risk, as NuStar is forging its deleveraging plan.
NuStar Logistics' unsecured notes are rated Ba3, at the level of the Ba3 CFR, reflecting a debt capital structure that is comprised of almost all unsecured debt. NuStar Logistics' various unsecured bonds and its 2020 revolving credit facility are unsecured and pari passu. NuStar Logistics' subordinated notes and NuStar's preferred units are rated B2, two notches below the Ba3 CFR, reflecting their respective contractual and structural subordination to NuStar Logistics' debt obligations. If the revolver were to become secured or secured debt was added to the capital structure then the senior unsecured notes would likely be downgraded.
Moody's expects NuStar's liquidity profile to remain constrained by weak free cash flow generation, after several years of significant investment and free cash flow deficits funded by borrowing and by issuing preferred securities. The SGL-3 rating anticipates that the company will continue to proactively manage its significant refinancing needs in 2021-23.
NuStar's principal source of liquidity is its committed $1 billion revolving credit facility that matures in October 2023. The credit facility is unsecured, but drawings are subject to a material adverse change clause. The credit facility has two financial covenants (debt/EBITDA of no greater than 5.0x and EBITDA/ Interest of at least 1.75x). We expect NuStar to remain in compliance with the financial covenants in 2020-21.
Moody's expects that NuStar will proactively manage its significant annual refinancing needs. In April 2020, the company raised a 3-year term loan to address near term maturities, including $450 million senior notes due in September 2020 and $300 million senior notes maturing in February 2021. At June 2020, NuStar reported $889 million available for borrowing under its facility. Supporting NuStar's liquidity profile is its large asset base as well as its unsecured capital structure and the corresponding flexibility to sell assets or raise secured financing to raise cash.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Considering the large amount of preferred liabilities outstanding, a deterioration in leverage, with debt/EBITDA exceeding 5.5x or weaker liquidity may lead to a downgrade of the rating. The Ba3 rating may be upgraded if the company delivers on the growth potential of its now completed Permian Crude System acquisition and lays the foundation of the financial framework which will allow it to maintain sound liquidity and leverage below 4.5x debt/EBITDA, as well as reduce the financial burden of distributions, including payments on various preferred units.
NuStar Energy is a sizable and diversified pipeline and storage company operating a network of oil and refining product pipelines in the Permian and Eagle Ford basins in Texas, and an interstate ammonia pipeline connecting production and terminals in Louisiana with America's corn belt. NuStar also owns and operates large crude and refining products storage network across the Midwest.
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.
REGULATORY DISCLOSURES
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.3437130
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Elena Nadtotchi VP - Senior Credit Officer 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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