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Rating Action:

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

08 Dec 2005
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 The corporate family ratings for MMP (Ba1) and MGG (Ba3) were withdrawn.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 over time.

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.

RATING OUTLOOK

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 of leverage.

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.

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Mihoko Manabe
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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