Fitch views the potential increase in size and scale as favorable from a credit perspective provided NGL manages the balance sheet. Consolidation of TransMontaigne Partners would simplify NGL's structure and provide for additional growth opportunities.
The potential acquisition involves NGL acquiring approximately 80.3% of TransMontaigne Partners since it already owns 19.7% of the LP units. In total, NGL would acquire approximately 12.9 million units currently valued at
The 'BB' rating is supported by NGL's strategy to operate with strong distribution coverage and diverse operations which are located throughout the U.S. Since NGL has significant senior secured debt ahead of the senior unsecured debt, the unsecured debt is notched down to 'BB-'.
Concerns include NGL's short operating history and growth through numerous acquisitions since it was formed in 2010 and IPO'd in 2011. Fitch believes that acquisitions will continue to be significant for NGL as it seeks to expand its operations and increase distributions paid to unitholders. Other concerns include NGL's modest size, and the weather-linked volatility associated with the company's retail propane business which accounted for 34% of fiscal year 2014 (FY2014) EBITDA.
Following significant acquisition activity in FY2014, leverage as defined by Fitch as total debt to adjusted EBITDA was 6.4x as of FY2014 (fiscal year ends
Leverage expectations are viewed as appropriate by Fitch for NGL's 'BB' rating. Given NGL's aggressive acquisition strategy, maintenance of its rating will in large part depend on its willingness and ability to issue equity to help fund growth.
NGL is focused on significant growth via organic projects and acquisitions. Fitch expects acquisitions to be NGL's larger focus as it enables the partnership to quickly ramp up in size and scale. The offset to this is that multiples paid for acquisitions are higher than organic growth projects.
Prior to the completed acquisition on
Following the June bond offering of
In late 2013, NGL increased the size of its secured revolving credit facility to
Financial covenants in the bank agreement do not allow leverage (as defined by the bank agreement) to exceed 4.25x. With permitted acquisitions, this temporarily increases to 4.5x. As of FY2014, the bank-defined leverage ratio was approximately 3.0x. Interest coverage must exceed 2.75x and it was approximately 7.0x at the end of FY2014. The bank agreement allows working capital borrowings and letters of credit to be excluded from the leverage calculation. NGL gets pro forma EBITDA credit for acquisitions, which is typical for master limited partnership (MLP) bank agreements.
The borrowing base is the sum of: all cash collateral, 85% of accounts receivable, 80% of inventory (less 50% of prepaid inventory), 90% of eligible futures accounts, and 80% of letters of credit for commodities not yet received, less all first purchaser liability, less 100% of secured bank obligations attributable to overdrafts, less 120% of secured hedging obligations, and less 100% of excise tax liabilities. The borrowing base calculation is done at the end of each month.
The company maintains a solid distribution coverage ratio (DCR) which it targets to be approximately 1.5x. With increased distributions, the coverage ratio was 1.1x at the end of FY2014 which is below coverage of 1.5x at the end of FY2013 and management's target. Fitch forecasts EBITDA and DCF growth in FY2015 and expects the DCR to be closer to 1.5x at the end of the current fiscal year.
NGL has indicated that in FY2014, approximately 40%-45% of EBITDA was generated from fee-based assets. It targets 60% of EBITDA from fee-based assets in the next 12-18 months.
NGL's assets are diverse and are comprised of retail propane (34% of FY2014 segment EBITDA), water services (24%), liquids (31%), crude logistics (8%) and other (3%). Furthermore, its assets are located throughout the U.S. Recent acquisitions include crude oil midstream assets (
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (
--'Pipelines, Midstream, and MLP Stats Quarterly - Fourth-Quarter 2013' (
--'Credit Considerations for the GP/LP Relationship' (
--'Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors' (
--'Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs' (
--'Master Limited Partnerships 101' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Pipelines, Midstream, and MLP Stats Quarterly - Fourth-Quarter 2013
Credit Considerations for the GP/LP Relationship
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs
Master Limited Partnerships 101
Source: Fitch Ratings
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