MOODY'S UPGRADES MAGELLAN MIDSTREAM PARTNERS' RATINGS TO Baa3 SR. UNS. (FROM Ba1); ASSIGNS FIRST-TIME BANK LOAN AND CORPORATE FAMILY RATINGS TO MGG HOLDINGS; WITHDRAWS MIDSTREAM HOLDINGS' RATINGS; OUTLOOKS STABLE
About $500 Million of Debt Securities Upgraded/Term Loan of About $275 Million Newly Rated
New York, December 08, 2005 -- Moody's Investors Service upgraded the debt ratings of Magellan
Midstream Partners, L.P. (MMP) to Baa3 senior unsecured
from Ba1. The upgrade concludes a review for upgrade initiated
on June 20, 2005 after MMP demonstrated a sustained improvement
in its credit profile. Moody's withdrew the Ba3 bank loan
rating of its general partner (GP) sponsor Magellan Midstream Holdings,
L.P. (MGG). For MGG Holdings, L.P.
(Holdings), the recently created parent company of MGG, Moody's
assigned first-time ratings of Ba3 to its proposed senior secured
term loan and a corporate family rating of Ba1. The corporate family
ratings for MMP (Ba1) and MGG (Ba3) were withdrawn. The rating
outlook is stable for MMP and Holdings. Moody's notes that
Holdings' rating could be considered for possible downgrade,
should Holdings implement a new term loan that turns out to be significantly
more liberal than the draft terms we have reviewed.
These rating actions reflect MMP's continued strong performance
from the Shell assets that have been reasonably in line with MMP's
forecasts in the first year since they were acquired. The Shell
assets have added to the good results of MMP's legacy assets --
the Magellan Pipeline and terminals -- both which have sustained
modest gains from increased unit rates and volumes. MMP's
credit metrics are solidly in line with, or somewhat better than,
the average of investment grade peers'. Since it was formed
over five years ago, MMP has accrued a track record of sound financial
policy and a consistent strategic focus on product pipelines and terminals.
These assets have low business risk relative to the investment-grade
MLP peer group.
Given the very similar economic interests of Holdings, MGG,
and MMP and Holdings's effective combined control of MMP and MGG,
Moody's has consolidated Holdings, MGG, and MMP into one credit
group. Previously, we had rated MMP and MGG as two separate
corporate families, but henceforth will rate both entities as part
of one corporate family. Accordingly, we assigned a Ba1 Corporate
Family Rating (formerly the Senior Implied Rating) to Holdings,
reflecting Moody's view of the Magellan group of companies as a consolidated
credit, and withdrew the Corporate Family Ratings of MMP and MGG.
The group's Corporate Family Rating is placed at the Holdings level,
the uppermost rated entity in the group.
RESTRUCTURING OF THE MAGELLAN GROUP AND ITS CREDIT IMPACTS
The Magellan group of companies is in midst of a restructuring.
The two private equity firms that own MGG and control MMP as general partner
recently formed Holdings as the ultimate parent of the group. MGG
has filed a Form S-1 with the SEC to IPO about 38% of its
L.P. units to the public probably in the 1Q06, depending
on when the SEC concludes its review.
Later this month, Holdings will place a term loan of up to $275
million that will take out MGG's existing $275 million term
loan. Holdings essentially replaces MGG as the sponsors'
vehicle to hold their GP and LP interests in the Magellan group.
There is no plan to incur debt at the MGG level, except for a working
capital facility of no greater than $ 5 million that Holdings will
provide. We expect Holdings' term facility to prohibit any
other debt at MGG as an event of default.
The sponsors may well finance Holdings in much the same way they have
financed MGG during the two-and-a-half years they
have controlled Magellan. The Holdings' loan will be the
fourth in a series of loans the sponsors have placed during their tenure.
There has been a pattern of the sponsors liquidating their equity units
and paying down the loan, then re-leveraging with a new loan.
Each new loan refinanced the previous one and enabled a special distribution
to the sponsors.
The IPO is expected to net proceeds of about $471 million,
which will be distributed to Holdings. Holdings will pay down a
portion (approximately $80-$100 million) of its term
loan to arrive at a 6.0x debt/cash flow based on MGG's starting
annualized distribution rate.
Holdings' loan is expected to be structured in much the same way
as MGG's existing loan with similar covenants. The collateral
for this new loan will be Holdings' MGG GP and LP interests,
the company's only assets. Financial covenants include a
debt/cash flow maximum of 6.5x, a cash flow/interest minimum
of 1.75x, and a minimum value (market value of MGG LP holdings)/loan
ratio of 2.5x. Additionally, MMP debt/EBITDA over
4.5x (vs. actual performance of below 3x currently) is considered
an event of default. As with MGG's current loan, the
new loan has a mandatory cash sweep mechanism, though in practice,
the covenant has not been effective in promoting ongoing debt reduction.
The Ba3 senior secured rating on Holdings' term loan reflects the
lenders' structural subordination to the roughly $800 million
of debt at MMP and Holdings' reliance on equity distributions from
MGG, which in turn is reliant on GP distributions from MMP for all
its cash flows. Holdings' rating is suppressed by our view
that ongoing organic credit accretion is unlikely, given the potential
that Holdings will re-leverage from time to time to accelerate
the sponsors' returns and to maintain a fair amount of leverage
The Ba3 is supported by the proven durability in MMP's cash flows,
the ultimate source of Holdings' cash flows. Due to the incentive
distribution rights mechanism in MMP's partnership agreement,
however, the MMP GP distributions that comprise substantially all
of MGG's cash flows are more sensitive than LP distributions to
any changes in MMP's distributable cash flow. MGG's
cash flow streams consequently have higher potential volatility than the
underlying MMP's distributable cash flow. Holdings'
cash flows are most at risk within the group, since they are all
derived from MGG's equity distributions.
At this point, Moody's does not believe that the expectations
of MGG's third-party LP unitholders, its sponsors,
and Holdings' lenders will pose undue dividend pressure on MMP.
Although the restructuring adds the claim on cash from MGG's public
minority interest holders, the amount of debt above MMP is expected
to be about the same as before. On a consolidated group basis,
MMP's cash flows are burdened proportionally with less debt than
are other MLPs' that are similarly structured. However,
we do note that MMP recently declared a distribution that was 19%
higher than the same period the year before, and 7% over
the previous quarter. We expect that this higher distribution rate
over time will bring MMP's above-average distribution coverages
down in line with its peers'. MMP's ratings could be
downgraded if the group restructuring leads to MMP becoming more aggressive
in its distribution policy or less willing to issue equity.
The outlook for the Magellan group of companies for the next 12-18
months is stable. This reflects the expectation that MMP's
existing portfolio of durable assets will continue to post consistent
results, and that management will manage its distribution increases
and finance investments with adequate equity, so as to sustain a
level of financial performance incorporated into our ratings.
At the MMP standalone level, we expect adjusted debt/gross cash
flow in the 3-4x range, EBITDAR/interest in the 5x range,
and coverage ratio (in terms of gross cash flow - sustaining capex
+ interest / interest + distributions) comfortably in excess
of 1.0x. For Holdings on a standalone basis, the rating
assumes debt/cash flow comfortably below 6x, cash flow/interest
in the upper 2x range. On a consolidated basis (including MMP and
Holdings' debt), the ratings incorporate debt/EBITDA in the
3x range. Significant variance from these ranges will warrant a
reassessment of our ratings and outlook.
WHAT COULD CAUSE THE RATING TO GO UP
We could consider MMP's ratings for an upgrade in about a 12-18
month timeframe if it continues to post results in line with current expectations.
Holdings' ratings are unlikely to go up, based on the private
equity sponsors' history of re-leveraging their vehicle from
time to time to accelerate their returns and tolerance for a fair amount
WHAT COULD CAUSE THE RATING TO GO DOWN
Addition of significant amount of debt at the Holdings or MGG level could
cause a downgrade for MMP. Conversely, a downgrade of MMP's
ratings could precipitate a more severe downgrade of Holdings' ratings.
The ownership of Holdings by private equity firms and their effective
control over the management of MGG and MMP presents future event risk
for the Magellan group of companies, including a change in ownership,
a recapitalization, or another organizational restructuring.
Headquartered in Tulsa, Oklahoma, Magellan Midstream Partners,
L.P. is an MLP that is engaged in the transportation,
storage, and distribution of refined petroleum products, crude
oil, and ammonia. Magellan Midstream Holdings, L.P.
is a limited partnership that indirectly owns general partner interests
representing about 2% of the MLP. MGG Holdings, L.P.,
a partnership between Madison Dearborn Capital Partners IV, L.P.
and Carlyle/Riverstone MLP Holdings, L.P., that
owns limited and general partner interests in Magellan Midstream Holdings.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service