Rating Action: Moody's downgrades Summit Midstream Partners to B3 CFR, B3-PD/LD PDR; negative outlook
Global Credit Research - 02 Sep 2020
New York, September 02, 2020 -- Moody's Investors Service (Moody's) downgraded Summit Midstream Partners, LP's (SMLP) Corporate Family Rating (CFR) to B3 from B2 and perpetual preferred units rating to Caa3 from Caa2. SMLP's Probability of Default Rating was downgraded to B3-PD/LD from B2-PD while appending the PDR with an "/LD" designation. SMLP's Speculative Grade Liquidity (SGL) Rating remains SGL-4. The rating outlook remains negative.
Moody's concurrently downgraded Summit Midstream Holdings, LLC's (Summit) senior unsecured notes rating to Caa2 from Caa1. The rating outlook remains negative.
Moody's also downgraded Summit Midstream Partners Holdings, LLC's (SMP Holdings, an unrestricted subsidiary of SMLP) CFR to Ca from Caa2, PDR to Ca-PD from Caa2-PD and senior secured term loan rating to Ca from Caa2. The rating outlook remains negative.
"The downgrade of Summit Midstream Partners' rating reflects rising debt refinancing and additional distressed exchange risk as its maturities approach," said Amol Joshi, Moody's Vice President and Senior Credit Officer. "The company also faces volumetric and cash flow risk due to coronavirus' negative effect on E&P capital spending and the global economic outlook, and uncertainty regarding future volumes in its key basins."
..Issuer: Summit Midstream Partners, LP
.... Corporate Family Rating, Downgraded to B3 from B2
.... Probability of Default Rating, Downgraded to B3-PD/LD from B2-PD
....Perpetual Preferred Stock, Downgraded to Caa3 (LGD6) from Caa2 (LGD6)
..Issuer: Summit Midstream Holdings, LLC
....Senior Unsecured Notes, Downgraded to Caa2 (LGD5) from Caa1 (LGD5)
..Issuer: Summit Midstream Partners Holdings, LLC
.... Corporate Family Rating, Downgraded to Ca from Caa2
.... Probability of Default Rating, Downgraded to Ca-PD from Caa2-PD
....Senior Secured Term Loan, Downgraded to Ca (LGD4) from Caa2 (LGD3)
..Issuer: Summit Midstream Partners, LP
....Outlook, Remains Negative
..Issuer: Summit Midstream Holdings, LLC
....Outlook, Remains Negative
..Issuer: Summit Midstream Partners Holdings, LLC
....Outlook, Remains Negative
Moody's considers SMLP utilizing approximately $78 million in cash as of July 13 to repurchase roughly $28 million face value of 5.50% senior notes due August 2022 and $106 million face value of 5.75% senior notes due April 2025 as a distressed exchange for the senior unsecured notes, which is a default under Moody's definition of default. Moody's appended the B3-PD PDR with an "/LD" designation indicating limited default. The LD designation will be removed after three business days. Subsequent to July 13, the company has announced additional debt repurchases of roughly $4 million face value of the senior notes due August 2022.
The Summit entities face a number of financing and refinancing challenges over the next few years. Summit has a $268 million unsecured notes maturity in August 2022 as well as its revolving credit facility maturity in May 2022. SMP Holdings' term loan also matures in May 2022. An unrestricted subsidiary of SMLP indirectly owns SMLP's 70% interest in the Double E natural gas pipeline project in the Delaware Basin (Double E Project), which will need additional funding. At the same time, SMLP has struggled to grow operating cash flow, and this low commodity price environment increases volumetric and cash flow risk for gathering & processing (G&P) companies. As a result, SMLP faces rising debt refinancing and additional distressed exchange risk as its maturities approach. These risks resulted in the downgrade of SMLP's rating to B3 CFR with a negative outlook.
SMLP's B3 CFR is supported by its geographically diverse G&P assets and diversified customer base. Over 95% of the company's 2019 gross margin was derived from fee-based contracts, which in many cases is supported by acreage dedications and minimum volume commitments (MVCs). SMLP's capital spending will be considerably reduced in 2020, and it will likely be focused in the Utica, Williston and DJ Basins, while Delaware Basin activity will include spending associated with the Double E Project. Capital spending in its legacy assets in the Piceance Basin, Barnett Shale and Marcellus Shale should be minimal. Leverage should remain high through 2020 and is higher when consolidated for SMP Holdings' debt. The completion of the Double E Project, which is held at an unrestricted subsidiary, could improve the company's profile but its funding over the next year should further increase consolidated debt balances. While SMLP owns SMP Holdings now, SMLP continues to owe the remaining deferred purchase price obligation due in January 2022 related to certain assets dropped down from SMP Holdings in 2016.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The exploration and production (E&P) sector has been one of the sectors most affected by the shock given its sensitivity to demand and commodity prices, and this in turn has affected the volumes that G&P companies gather and process. Today's action reflects the impact on SMLP, Summit and SMP Holdings of the deterioration in credit quality it has triggered, given their exposure to a period of low commodity prices and likely decreasing volumes, which has left the companies vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
SMLP's SGL-4 Speculative Grade Liquidity Rating reflects its weak liquidity profile. At June 30, 2020, SMLP had $36.6 million of cash as well as $5 million of restricted cash, and $733 million drawn under Summit's $1.25 billion secured revolving credit facility. The revolving credit facility matures in May 2022 and has financial covenants including a maximum total leverage ratio of 5.5x, maximum senior secured leverage ratio of 3.75x, and a minimum interest coverage ratio of 2.5x. The company was in compliance with these covenants as of June 30. However, availability under the revolver was constrained by these covenants and was approximately $191 million at June 30.
On August 25, the company commenced cash tender offers to purchase a portion of its senior unsecured notes. The company plans to settle the cash tender offers on September 24.
Summit's unsecured notes are rated Caa2, two notches below SMLP's B3 CFR, reflecting the priority claim of Summit's relatively large $1.25 billion revolver to its assets. The preferred units are rated Caa3, three notches below SMLP's B3 CFR, and they receive 100% equity treatment. The company announced on July 31 that it accepted a portion of its preferred units for exchange into newly issued common units. We believe that the Caa3 rating on the preferred units is more appropriate than the rating suggested by Loss Given Default for Speculative-Grade Companies.
SMP Holdings' Ca CFR reflects its structural subordination to the debt at Summit and preferred units at SMLP. SMP Holdings is an entity without any operating assets. Upon SMLP's acquisition of Summit Midstream Partners, LLC (Summit Investments), the private entity that indirectly owns SMLP's general partner (GP), the SMP Holdings' term loan continues to be secured by 34.6 million SMLP common units and the non-economic GP interest in SMLP, while being non-recourse indebtedness to SMLP and its operating subsidiaries. SMP Holdings' ability to service its debt is reliant on payments made by SMLP to SMP Holdings related to SMLP's remaining deferred purchase price obligation due in January 2022. The Ca CFR and the four notch difference to SMLP's B3 CFR further reflects SMP Holdings' unsustainable leverage on a stand-alone basis. Moody's expects that there will be no additional debt at SMP Holdings, but there exists a $25 million revolver carve-out.
The Ca rating on SMP Holdings' senior secured term loan, constituting all of its debt, is in line with its CFR, and reflects the term loan's first priority claim on the 34.6 million SMLP common units and the non-economic GP interest in SMLP.
SMP Holdings has a weak liquidity profile. SMP Holdings' liquidity could worsen if payments received from SMLP are reduced. With limited administrative overhead though, SMP Holdings does not have significant liquidity needs. SMP Holdings' term loan has a minimum interest coverage ratio requirement of 2x. There is a 1% mandatory amortization of the term loan per annum and 100% excess cash flow recapture when stand-alone leverage is above 2x, but stepping down to 75% when standalone leverage ratio is less than 2x. SMP Holdings is reliant on payments from SMLP to remain in compliance with its covenants, and faces rising debt refinancing as well as restructuring risk.
SMLP's negative outlook reflects rising debt refinancing and additional distressed exchange risk in a low commodity price environment.
SMP Holdings' rating outlook is negative, reflecting its unsustainable leverage.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A rating downgrade of SMLP could be considered if SMLP's consolidated leverage (including debt at SMP Holdings as well as SMLP's unrestricted subsidiary that indirectly owns its 70% interest in the Double E Project) exceeds 7x, SMLP's scale reduces materially due to asset sales without adequate debt reduction, or liquidity deteriorates. An upgrade of SMLP is possible if the company maintains consolidated leverage (including debt at SMP Holdings as well as SMLP's unrestricted subsidiary that indirectly owns its 70% interest in the Double E Project) below 6x, and achieves adequate liquidity while addressing upcoming maturities and the funding of the Double E Project.
A downgrade of SMP Holdings would occur if SMLP is downgraded, or if payments received from SMLP are not sufficient. An upgrade of SMP Holdings could be considered if SMLP's rating is upgraded.
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.
Summit Midstream Partners, LP is a publicly-traded master limited partnership primarily engaged in natural gas, crude oil and produced water gathering and/or processing in the Utica Shale, Williston Basin, Piceance Basin, DJ Basin, Barnett Shale, Delaware Basin and Marcellus Shale. SMP Holdings is SMLP's unrestricted subsidiary without any operating assets, whose term loan is secured by 34.6 million SMLP common units and the non-economic GP interest in SMLP.
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.
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Amol Joshi, CFA 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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