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12 Feb 2002
MOODY'S ASSIGNS Baa3 RATING TO KANEB PIPE LINE'S DEBT; PLACES STATIA TERMINALS' RATINGS UNDER REVIEW FOR POSSIBLE UPGRADE (B1 SR. IMP./SEC.)
About $250 Million of Kaneb's Debt Newly-Rated; $107 Million of Statia's Placed on Review for Upgrade.
New York, February 12, 2002 -- Moody's Investors Service assigned a first-time Baa3 senior unsecured
long-term debt rating to the proposed senior notes of Kaneb Pipe
Line Operating Partnership, L.P. (KPOP). Kaneb's
rating outlook is stable.
Moody's also placed Statia Terminals International N.V.'s
B1 senior secured rating under review for possible upgrade pending Kaneb's
expected acquisition of Statia. Should the acquisition close on
the terms and in the timeframe expected, the rating on Statia's
first mortgage notes would be adjusted to Ba1, and Statia's senior
implied and issuer ratings would be withdrawn. Post-acquisition,
Statia would be a wholly-owned subsidiary of KPOP but its notes
would not be assumed or guaranteed by KPOP.
KPOP is an operating subsidiary of Kaneb Pipe Line Partners, L.P.
(Kaneb), a publicly-traded master limited partnership (MLP)
that conducts its operations through KPOP, which holds product pipelines
in the Midwest, and Support Terminals Operating Partnership,
which holds a terminaling operations in the US and UK.
In November 2001, Kaneb announced its definitive agreement to acquire
all of the subsidiaries of Statia Terminals Group NV (Statia), including
Statia Terminals International N.V., for $193
million in cash plus the assumption of $107 million of Statia debt.
Statia Terminals International's first mortgage bonds constitute substantially
all the debt of Statia. The completion of the acquisition is subject
to shareholder approval expected at the end of February.
Kaneb's ratings incorporate the relatively stable overall margins and
cash flows from both the pipeline and terminaling segments of the combined
company, Kaneb's track record of making judicious acquisitions and
successfully integrating them, and its conservative financial policies.
The ratings are restrained by an ongoing high distribution rate that is
typical of MLPs and event risk from future acquisitions. Moody's
expects that acquisitions may be larger than those Kaneb has made in the
past and may include non-U.S. operations.
The stable ratings outlook assumes that future acquisition activity would
have an appropriate mix of debt and equity funding.
The acquisition of Statia would further Kaneb's geographic, product,
and customer diversification. Statia's two terminals in the Caribbean
and Nova Scotia are strategically located along major crude oil shipping
routes and have deepwater access, both of which are competitive
advantages. Statia's historic results, however, have
fluctuated. Terminaling and storage demand tends to decline when
the forward curve for crude oil is backwardated, and marine services
and product sales earnings vary with activity levels. In addition,
Statia's Caribbean facility is vulnerable to hurricanes
Although Statia adds earnings with potential for some fluctuation to Kaneb,
a substantial portion of Kaneb's EBITDA after the acquisition will come
from businesses that generate stable cash flows (about 60% of EBITDA
from the combine non-volume sensitive terminaling and storage services,
about 33% from regulated refined product transportation,
the balance 6% from Statia's volume-sensitive businesses).
Kaneb's product pipeline, terminaling and storage operations are
largely unaffected by business cycles and the forward curve. Even
if there is a drop in Statia's volume-sensitive businesses,
we expect that the steady cash flows from the rest of the combined company
would cover its debt service, sustaining capital expenditures,
Kaneb has a track record of increasing cash flow internally through cost
reduction as well as through acquisitions. An efficient operator,
the company has maintained healthy returns during a period of steady growth.
It is conservatively financed. In the last ten years, it
has raised equity five times (the last time was in January of this year)
to pay down bank debt incurred in acquisitions. Kaneb's modest
debt levels (debt-to-EBITDA in the two times range) and
robust cash flow coverage compare favorably against its MLP peers',
most of which are larger than Kaneb.
As an MLP, Kaneb distributes all available cash, which prevents
it from internally forming equity and leaves little cushion for cash flow
variability and any capital expenditures above base maintenance levels.
Nominal earnings retention makes MLPs particularly dependent on access
to the capital markets to fuel growth. The pressure to increase
distributions and, consequently, to make acquisitions poses
event risk for MLPs in general and can restrain their ratings.
Kaneb's target debt-to-EBITDA in the 3 to 3.75 times
range, is higher than its historic levels, indicating a greater
role for debt in support of M&A activity in the future. Acquisitions
are an important ongoing element of Kaneb's growth objectives and have
potential to be more frequent and larger than in the past. The
$300 million Statia acquisition will be Kaneb's largest acquisition
ever and will mark the second year in a row that it will make its largest
acquisition to-date. Statia will roughly double Kaneb's
debt while increasing its EBITDA by half. Pro forma for the Statia
acquisition and recent unit issuance, debt-to-EBITDA
is about 3 times. Kaneb expects to continue its past practice of
financing its acquisitions with a sufficient amount of equity and exercising
discipline in the multiples it pays.
The current senior note issue is Kaneb's entree into the public
debt market. The company's new indenture restricts transactions
with its affiliates, limits secured debt that would cause structural
subordination of senior noteholders, and provides for cross-default
to material debt. We believe that these covenants provide good
protection for the senior noteholders as Kaneb continues to grow,
possibly evolving in new directions.
Headquartered in Richardson, Texas, Kaneb Pipe Line Partners,
LP is a major transporter of refined petroleum products in the Midwest
and a leading independent liquids terminaling company in the United States
and the United Kingdom. Statia Terminals International N.V.
is a subsidiary of Statia Terminals Group N.V., which
owns and operates storage and transshipment facilities serving the oil
industry. Statia Terminals Group is headquartered in Curacao,
Moody's Investors Service
Vice President - Senior Analyst
Moody's Investors Service
No Related Data.
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