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Rating Action:

Moody's assigns B3 rating to Summit Midstream's perpetual preferred units

08 Nov 2017

New York, November 08, 2017 -- Moody's Investors Service ("Moody's") assigned a B3 rating to Summit Midstream Partners, LP's (SMLP) proposed Series A fixed-to-floating rate cumulative redeemable perpetual preferred units (preferred units). Net proceeds from this preferred units issuance will be used to repay a portion of the outstanding borrowings under Summit Midstream Holdings, LLC's (Summit) revolving credit facility.

Moody's concurrently assigned a Ba3 Corporate Family Rating (CFR), a Ba3-PD Probability of Default Rating (PDR) and a SGL-3 Speculative Grade Liquidity (SGL) Rating to SMLP. SMLP's rating outlook is stable.

Summit's B1 CFR, B1-PD PDR and SGL-3 Speculative Grade Liquidity ratings were withdrawn (these ratings were effectively moved to SMLP), and Summit's senior unsecured notes were upgraded to B1 from B2. Summit's rating outlook remains stable.

Moody's also affirmed Summit Midstream Partners Holdings, LLC's (SMP Holdings, an indirect parent of Summit) ratings, including its B3 CFR, B3-PD PDR, and B3 senior secured term loan rating. The rating outlook is stable.

SMP Holdings, through its subsidiaries owns and operates midstream energy infrastructure assets that are located in the producing areas of unconventional resource basins in the continental United States. SMP Holdings, together with its core wholly-owned subsidiary Summit Midstream GP, LLC, own a 2% GP interest, the deferred purchase price obligation from SMLP, and about 35% of the common LP interests and the IDRs in SMLP, a publicly-traded master limited partnership, that wholly owns Summit.

Rating Assignments:

Issuer: Summit Midstream Partners, LP

...Perpetual Preferred Units, Assigned B3 (LGD6)

...Corporate Family Rating, Assigned Ba3

...Probability of Default Rating, Assigned Ba3-PD

...Speculative Grade Liquidity Rating, Assigned SGL-3

Ratings Upgraded:

Issuer: Summit Midstream Holdings, LLC

...Senior Unsecured Bonds/Debentures, Upgraded to B1 (LGD5) from B2 (LGD5)

Ratings Withdrawn:

Issuer: Summit Midstream Holdings, LLC

...Corporate Family Rating, Withdrawn B1

...Probability of Default Rating, Withdrawn B1-PD

...Speculative Grade Liquidity Rating, Withdrawn SGL-3

Ratings Affirmed:

Issuer: Summit Midstream Partners Holdings, LLC

...Corporate Family Rating, Affirmed B3

...Probability of Default Rating, Affirmed B3-PD

...Senior Secured Term Loan, Affirmed B3 (LGD3)

Outlook Action:

Issuer: Summit Midstream Partners, LP

...Outlook, Stable

Issuer: Summit Midstream Holdings, LLC

...Outlook, Stable

Issuer: Summit Midstream Partners Holdings, LLC

...Outlook, Stable

RATINGS RATIONALE

The proposed preferred units are rated B3, three notches below SMLP's Ba3 CFR. We believe that the B3 rating is more appropriate for the preferred units than the rating suggested by Moody's Loss Given Default Methodology, and the preferred units will receive 100% equity treatment. Summit's unsecured notes are rated B1, one notch below SMLP's Ba3 CFR, reflecting the priority claim of Summit's relatively large $1.25 billion revolver to its assets, in accordance with Moody's Loss Given Default Methodology. If the proportion of revolver debt to senior unsecured notes increases, Summit's notes could get downgraded.

SMLP's Ba3 CFR is one notch higher than Summit's prior B1 CFR and reflects its modest but growing scale, geographically diverse assets and diversified customer base. The rating is also supported by a business model with over 95% of its revenue stream derived from fee-based contracts, which in many cases are supported by minimum volume commitments (MVCs) and acreage dedications. SMLP's organic growth is reliant on the development of certain assets that were dropped down in early 2016 from SMP Holdings, exposing the company's potential cash flow and EBITDA growth to execution risk. The issuance of preferred units to repay a portion of Summit's outstanding revolver debt will be deleveraging. Leverage is likely to remain at moderate levels through 2018; however, distribution coverage will worsen due to the additional preferred unit dividends.

The uncertainty associated with the funding structure of the large deferred purchase price payment obligation due in 2020 continues to pressure SMLPs rating. This is mitigated by Summit's extension of the $1.25 billion revolving credit facility that pushes the maturity well beyond the deferred payment date, which provides greater visibility into its ability to fund the payment. In addition, this preferred unit issuance helps, as it will receive 100% equity treatment as a speculative grade company. Under the terms of the 2016 dropdown, SMLP at its option, may satisfy all, or a portion, of the deferred purchase price obligation in SMLP common units.

SMLP's SGL-3 Speculative Grade Liquidity Rating reflects its adequate liquidity profile through 2018. SMLP had $2.9 million of cash and $506 million drawn under its $1.25 billion secured revolving credit facility as of September 30, 2017. Pro forma for the $300 million preferred unit issuance, Moody's estimates revolver drawings will drop to approximately $200 million. 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. Availability under the revolver will be constrained by these covenants. We expect SMLP to maintain compliance with these covenants through 2018.

SMLP's stable outlook incorporates the execution risk associated with developing the Utica assets that were dropped down in early 2016 to realize EBITDA and cash flow growth.

An upgrade of SMLP is possible if the company demonstrates progress towards sustaining leverage around 3.5x and consolidated leverage around 4.5x, and distribution coverage around 1.2x, while increasing EBITDA through further development of the Utica assets. SMLP also needs to further address the funding structure of the large deferred purchase price obligation due in 2020.

A rating downgrade of SMLP could be considered if standalone SMLP leverage exceeds 4.5x, or consolidated leverage (including SMP Holdings) exceeds 5.5x, or Summit's distribution coverage stays below 1.1x beyond 2018.

SMP Holdings' B3 CFR reflects its structural subordination to the debt at Summit and the proposed preferred units at SMLP, and SMP Holdings' standing as a pure-play general partner (GP) without any other assets. SMP Holdings, together with its wholly-owned subsidiary Summit Midstream GP, LLC, own a 2% GP interest, the deferred purchase price obligation from SMLP, and about 35% of the limited partnership (LP) units and the incentive distribution rights (IDR), in SMLP. SMP Holdings' ability to service its proposed term loan is solely reliant on distributions from SMLP, a distribution stream which is junior to SMLP's preferred unit distributions and substantial financing and operating requirements, and Summit's debt.

The B3 CFR and the three notch difference to SMLP's Ba3 CFR further reflects SMP Holdings' high leverage on a stand-alone basis of about 4.3x debt to annualized Q2 2017 EBITDA (distributions less G&A). The rating incorporates Moody's expectation that leverage will be reduced to a more reasonable level of under 3.5x by mid-2018 driven by mandatory repayments from the excess cash flow sweep feature that has been built into the term loan structure. The rating is based on the expectation that there will be no additional debt at SMP Holdings except for a $25 million revolver carve-out. SMP Holdings could also sell up to 3.5 million SMLP units without requiring a mandatory offer to prepay a portion of the term loan, which could weaken leverage metrics somewhat, if exercised.

SMP Holdings' B3 rating on its senior secured term loan, constituting all of its debt, is in line with the CFR, in accordance with Moody's Loss Given Default Methodology and reflects the term loan's first priority claim on the equity ownership interest in SMLP.

SMP Holdings is expected to maintain adequate liquidity through 2018. However, SMP Holdings' liquidity will weaken if distributions received from Summit's parent, Summit Midstream Partners, LP (SMLP) are negatively impacted. With limited administrative overhead, SMP Holdings does not have significant liquidity needs and it should receive sufficient distributions from SMLP to comfortably cover pro forma interest expense. 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. The alternate sources of liquidity are limited given that substantially all assets secure the term loan, and net proceeds from the sale of LP units held at closing, beyond 3.5 million units, will be required to offer to repay the term loan.

SMP Holdings' rating outlook is stable, reflecting Moody's expectations for financial leverage to improve. An upgrade of SMP Holdings is unlikely in the near future, but could be considered if SMLP's rating is upgraded. A downgrade of SMP Holdings would occur if SMLP is downgraded, or if distributions received from SMLP are negatively impacted resulting in sustained stand-alone debt leverage remaining above 3.5x beyond mid-2018.

The principal methodology used in these ratings was Midstream Energy published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Amol Joshi, CFA
Vice President - Senior Analyst
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

No Related Data.
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