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Rating Action:

Moody's changes Summit Midstream's rating outlook to negative

10 Jul 2019

New York, July 10, 2019 -- Moody's Investors Service (Moody's) changed Summit Midstream Partners, LP's (SMLP) rating outlook to negative from stable. Moody's also affirmed SMLP's Ba3 Corporate Family Rating (CFR), Ba3-PD Probability of Default Rating (PDR), B3 perpetual preferred units rating and SGL-3 Speculative Grade Liquidity (SGL) Rating.

Moody's concurrently affirmed Summit Midstream Holdings, LLC's (Summit) B1 senior unsecured notes rating. The rating outlook was changed to negative from 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 was changed to negative from stable.

"The negative rating outlook reflects uncertainty regarding funding Summit Midstream's significant capital needs in 2020," said Amol Joshi, Moody's Vice President. "The company's leverage should remain moderate through 2019 but it could deteriorate next year if its capital needs are largely debt-funded, while its cash flow growth has been lower than expected and potential non-core asset sales could further shrink scale."

Rating Affirmations:

Issuer: Summit Midstream Partners, LP

...Corporate Family Rating, Affirmed Ba3

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

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

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

Issuer: Summit Midstream Holdings, LLC

...Senior Unsecured Notes, Affirmed B1 (LGD5)

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 Actions:

Issuer: Summit Midstream Partners, LP

...Outlook, Changed to Negative from Stable

Issuer: Summit Midstream Holdings, LLC

...Outlook, Changed to Negative from Stable

Issuer: Summit Midstream Partners Holdings, LLC

...Outlook, Changed to Negative from Stable

RATINGS RATIONALE

SMLP's Ba3 CFR reflects its geographically diverse gathering and processing assets and diversified customer base. Over 95% of the company's 2018 gross margin was derived from fee-based contracts, which in many cases is supported by minimum volume commitments (MVCs) and acreage dedications. SMLP's near-term organic growth spending will likely be focused in the Delaware, Williston and DJ Basins. Capital spending in its legacy assets in the Piceance Basin, Barnett Shale and Marcellus Shale should be modest, while spending in its core Utica assets has slowed considerably. Leverage should remain at moderate levels through 2019 but is higher when consolidated for SMP Holdings' debt. Cash flow growth has been lower than expected, while debt could increase significantly depending upon the mix of debt and equity used to fund the remaining $303.5 million deferred purchase price obligation due in 2020 related to certain assets dropped down from SMP Holdings in 2016, which continues to pressure SMLP's rating. In addition, the Double E Pipeline Project should improve SMLP's profile, but its funding over the next two years could further increase debt balances. Summit's revolver maturity is well beyond the deferred payment date, which provides greater visibility into its ability to fund the payment. 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.

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. We believe that the B1 rating on the unsecured notes is more appropriate than the rating suggested by Moody's Loss Given Default Methodology. If the proportion of revolver debt to senior unsecured notes increases due to factors including high utilization of the revolver, Summit's notes could get downgraded. The preferred units are rated B3, three notches below SMLP's Ba3 CFR, and they receive 100% equity treatment. We believe that the B3 rating on the preferred units is more appropriate than the rating suggested by Moody's Loss Given Default Methodology.

SMLP's SGL-3 Speculative Grade Liquidity Rating reflects its adequate liquidity profile. SMLP had $5.3 million of cash and $434 million drawn under Summit's $1.25 billion secured revolving credit facility as of March 31, 2019. 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 could be constrained by these covenants. As of March 31, the company was in compliance with these covenants.

SMLP's negative outlook reflects the uncertainty regarding the amount of debt used to support the company's 2020 funding needs. A rating downgrade of SMLP could be considered if standalone SMLP leverage exceeds 4.5x, consolidated leverage (including SMP Holdings) exceeds 5.5x, SMLP's scale reduces materially due to asset sales without adequate debt reduction, or liquidity deteriorates. While unlikely in the near-term, an upgrade of SMLP is possible if the company demonstrates progress towards sustaining leverage around 3.5x and consolidated leverage (including SMP Holdings) around 4.5x, maintain good distribution coverage, increase scale as well as further address the funding structure of the large deferred purchase price obligation due in 2020 and the Double E Pipeline Project.

SMP Holdings' B3 CFR reflects its structural subordination to the debt at Summit and preferred units at SMLP. SMP Holdings is a pure-play general partner (GP) without any other operating assets. At March 31, SMP Holdings owned about 42% of SMLP's limited partnership (LP) units and the non-economic GP interest in SMLP, as well as SMLP's remaining $303.5 million deferred purchase price obligation due in 2020. SMP Holdings' ability to service its debt is reliant on distributions from SMLP, a distribution stream which is junior to SMLP's substantial financing and operating requirements and SMLP's subsidiary Summit's debt, as well as SMLP's preferred units. 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 4.5x debt to annualized quarterly EBITDA (distributions less G&A), pro forma for the strategic actions announced in the first quarter of 2019 including the simplification transaction, SMLP's distribution cut and prepayment of a portion of SMP Holdings' debt. Moody's expects leverage will be reduced to 3.5x-4x through 2020 primarily driven by mandatory payments from the excess cash flow sweep feature that has been built into the term loan structure. Moody's further expects that there will be no additional debt at SMP Holdings, but there exists 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. However, the distribution of net proceeds from such a sale is subject to a 2x asset coverage test.

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

SMP Holdings should maintain adequate liquidity. However, SMP Holdings' liquidity will weaken if distributions received from SMLP are reduced. With limited administrative overhead, SMP Holdings does not have significant liquidity needs and it should receive sufficient distributions from SMLP to cover 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 negative, reflecting SMLP's negative rating outlook. A downgrade of SMP Holdings would occur if SMLP is downgraded, or if distributions received from SMLP are negatively impacted resulting in stand-alone debt leverage exceeding 4x in 2020. An upgrade of SMP Holdings is unlikely in the near future, but could be considered if SMLP's rating is upgraded.

The principal methodology used in these ratings was Midstream Energy published in December 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Summit Midstream Partners, LP is a publicly-traded master limited partnership primarily engaged in natural gas, crude oil and produced water gathering and/or processing in the Utica Shale, Williston Basin, Piceance Basin, DJ Basin, Barnett Shale, Delaware Basin and Marcellus Shale. At March 31, SMP Holdings owned about 42% of SMLP's LP units and the non-economic GP interest in SMLP.

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
VP-Sr Credit Officer
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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