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Rating Action:

Moody's downgrades EnLink's CFR to Ba2 and GIP III Stetson I's CFR to B3

14 Aug 2020

New York, August 14, 2020 -- Moody's Investors Service (Moody's) downgraded EnLink Midstream, LLC's (ENLC) Corporate Family Rating (CFR) to Ba2 from Ba1, Probability of Default Rating (PDR) to Ba2-PD from Ba1-PD and senior unsecured notes rating to Ba2 from Ba1. ENLC's Speculative Grade Liquidity (SGL) Rating remains SGL-2. The rating outlook remains stable.

Moody's also downgraded ENLC's subsidiary, EnLink Midstream Partners, LP's (ENLK, and collectively with ENLC, EnLink) senior unsecured notes rating to Ba2 from Ba1 and perpetual preferred units rating to B1 from Ba3. ENLK's rating outlook remains stable.

Concurrently, Moody's downgraded GIP III Stetson I, L.P.'s (GIP III Stetson I) CFR to B3 from B1, PDR to B3-PD from B1-PD and the senior secured term loan rating to B3 from B1. The term loan borrowers are GIP III Stetson I and GIP III Stetson II, L.P. (GIP III Stetson II, and collectively with GIP III Stetson I, GIP III Stetson). The borrowers are jointly and severally liable with respect to the term loan. The rating outlook remains stable.

"EnLink's downgrade reflects its rising volumetric risk, with likely increasing leverage and declining operating cash flow in 2021 due to coronavirus' negative effect on E&P capital spending and the global economic outlook, and uncertainty regarding future volumes in its key basins," said Amol Joshi, Moody's Vice President and Senior Credit Officer. "The downgrade of GIP III Stetson, which owns controlling interests in EnLink, reflects its weak cash flow and high stand-alone leverage."

Downgrades:

..Issuer: EnLink Midstream, LLC

.... Probability of Default Rating, Downgraded to Ba2-PD from Ba1-PD

.... Corporate Family Rating, Downgraded to Ba2 from Ba1

....Senior Unsecured Notes, Downgraded to Ba2 (LGD4) from Ba1 (LGD4)

....Senior Unsecured Shelf, Downgraded to (P)Ba2 from (P)Ba1

..Issuer: EnLink Midstream Partners, LP

....Senior Unsecured Notes, Downgraded to Ba2 (LGD4) from Ba1 (LGD4)

....Pref. Stock Non-cumulative, Downgraded to B1 (LGD6) from Ba3 (LGD6)

..Issuer: GIP III Stetson I, L.P.

.... Probability of Default Rating, Downgraded to B3-PD from B1-PD

.... Corporate Family Rating, Downgraded to B3 from B1

....Senior Secured Term Loan, Downgraded to B3 (LGD4) from B1 (LGD4)

Outlook Actions:

..Issuer: EnLink Midstream, LLC

....Outlook, Remains Stable

..Issuer: EnLink Midstream Partners, LP

....Outlook, Remains Stable

..Issuer: GIP III Stetson I, L.P.

....Outlook, Remains Stable

RATINGS RATIONALE

EnLink has struggled to grow operating cash flow, and this low commodity price environment increases volumetric risk in some of its key basins while reducing growth prospects. These risks should lead to lower operating cash flow and rising leverage in 2021, resulting in the downgrade of ENLC's CFR to Ba2. GIP III Stetson I's cash flow has weakened considerably since EnLink's distribution cut, resulting in high leverage and the downgrade of its CFR to B3.

ENLC's Ba2 CFR reflects its high proportion of fee-based revenue with cash flow visibility, but subject to increased volume risk. In March 2020, ENLC announced a significant unit distribution cut, boosting its distribution coverage while aiming to self-fund its 2020 capital spending needs. Good distribution coverage implies that EnLink will retain a higher proportion of cash flow, alleviating the pressure of seeking third party debt and dilutive equity to finance capital spending. EnLink also has a diversified gathering & processing (G&P) asset base, but the company has meaningfully cut capital spending and operating cash flow should decline in 2021. The company has a large exposure to the STACK, where it faces volume risk due to a substantial reduction in 2020 drilling activity by Devon Energy Corporation (Devon, Ba1 stable), its largest counterparty. EnLink also has significant exposure to the mature Barnett Shale, where volumes have been declining. EnLink will need to offset this volume and cash flow decline through capital intensive growth in other regions such as the Permian, which entails execution risk. EnLink's curtailed 2020 capital spending will largely be focused in the Permian Basin, followed by spending to enhance its Louisiana assets. EnLink receives significant revenue from Devon, and EnLink's rating reflects the company's sizable customer concentration risk with Devon.

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The exploration and production (E&P) sector has been one of the sectors most affected by the shock given its sensitivity to demand and commodity prices, and this in turn has affected the volumes that G&P companies gather and process. Today's action reflects the impact on EnLink and GIP III Stetson of the deterioration in credit quality it has triggered, given their exposure to a period of low commodity prices and likely decreasing volumes, which has left the companies vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.

ENLC's revolver, term loan and unsecured notes benefit from an upstream guarantee from ENLK. However, ENLK's unsecured notes do not benefit from downstream guarantees from ENLC or upstream guarantees from operating subsidiaries. EnLink intends to have all its assets at ENLK, and no assets are expected to be held at ENLC, allowing pari passu consideration for obligations at ENLC and ENLK. Furthermore, the obligations of ENLK's subsidiaries are not material in size relative to the unsecured notes to warrant notching below the CFR. The unsecured notes are therefore rated in-line with the Ba2 CFR. However, if the company holds material assets at ENLC, ENLC's obligations will have a priority claim to those assets which will pressure the ratings of ENLK's unsecured notes.

ENLC's SGL-2 rating reflects good liquidity, and EnLink should generate positive free cash flow in 2020 supported by its significant distribution cut and reduced capital spending. The company is aiming to self-fund its capital expenditures and reduce reliance on the capital markets. ENLC has a $1.75 billion revolving credit facility, which is guaranteed by ENLK and matures in January 2024. At June 30, the company had about $52 million of cash and $400 million outstanding under its credit facility. The revolver has two material financial covenants, a maximum consolidated leverage ratio of 5x (relaxed to 5.5x for the quarter of an acquisition and the following three quarters) and a minimum consolidated interest coverage ratio of 2.5x. Moody's expects the company to remain in covenant compliance over the next twelve months. EnLink's nearest significant maturity is its $850 million unsecured term loan maturing in December 2021. The term loan contains substantially the same covenants as the revolving credit facility.

GIP III Stetson I's B3 CFR reflects its structural subordination to the debt at EnLink, the company's standing as a pure-play entity without any hard assets, and its high stand-alone financial leverage. GIP III Stetson acquired Devon's controlling interests in the EnLink companies in July 2018. GIP III Stetson owns 100% interest in EnLink Midstream Manager (EMM, unrated) and about 40% equity interest in ENLC pro forma for ENLK's Series B preferred dilution. GIP III Stetson's ability to service its debt is solely reliant on distributions from EnLink, a distribution stream which is junior to EnLink's substantial financing and operating requirements. GIP III Stetson's leverage on a stand-alone basis pro forma for its reduced cash flow due to EnLink's distribution cut is very high.

The B3 rating on the senior secured term loan is in line with GIP III Stetson I's CFR, reflecting the term loan's first priority claim on the ownership interests in EMM and ENLC and it being the only debt outstanding at the company.

GIP III Stetson should have adequate liquidity, however, GIP III Stetson's cash flows have weakened considerably following EnLink's distribution cut. With limited administrative overhead, GIP III Stetson does not have significant liquidity needs and it should receive sufficient distributions from EnLink to cover interest expense and mandatory debt amortization. The financial maintenance covenant is a minimum debt service coverage ratio of 1.1x. There is a 1% mandatory amortization of the term loan per annum, which can be satisfied by the excess cash flow sweep, and 75% excess cash flow recapture when stand-alone leverage is above 5x, but stepping down to 50% when standalone leverage is equal to or less than 5x and 0% when standalone leverage is equal to or less than 2.5x. The alternate sources of liquidity are limited given that its ownership interests secure the term loan. GIP III Stetson could sell ENLC units but could be required to use part of the disposition proceeds to prepay a portion of the term loan.

ENLC's and ENLK's outlooks are stable reflecting good liquidity and distribution coverage.

GIP III Stetson I's rating outlook is stable, reflecting Moody's expectation for necessary coverage of interest expense and mandatory debt amortization.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

EnLink's rating could be downgraded if debt/EBITDA increases to exceed 5x, or consolidated leverage (inclusive of GIP III Stetson debt) exceeds 6x, or distribution coverage significantly deteriorates. Additional weakness in GIP III Stetson's credit profile would pressure EnLink's rating.

EnLink's rating could be upgraded if the company maintains debt/EBITDA comfortably below 4.5x and consolidated leverage (inclusive of GIP III Stetson debt) below 5x, while maintaining strong distribution coverage. For an upgrade, EnLink should also successfully grow cash flow to more than offset expected decline within its mature assets.

GIP III Stetson I's rating could be downgraded if EnLink is downgraded, if distributions received from EnLink decline further, or stand-alone EBITDA to interest expense falls below 1.5x.

GIP III Stetson I's rating could be upgraded if EnLink's rating is upgraded or stand-alone GIP III Stetson interest coverage increases above 2.5x.

The principal methodology used in these ratings was Midstream Energy published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

EnLink Midstream, LLC is a publicly traded company engaged in midstream energy services through its subsidiary EnLink Midstream Partners, LP, including the gathering, processing, fractionation, transportation and marketing of natural gas, natural gas liquids and crude oil in several US regions, including in the STACK, Cana and Arkoma Woodford Shales, Barnett Shale, Permian Basin and Louisiana.

GIP III Stetson owns controlling interests in the EnLink companies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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 - Senior 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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