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Rating Action:

Moody's downgrades NuStar's notes to Ba2, subordinated notes and preferred units to B1, outlook negative

09 Feb 2018

New York, February 09, 2018 -- Moody's Investors Service, ("Moody's") downgraded the ratings of NuStar Energy L.P. (NuStar) and NuStar Logistics L.P. (NuStar Logistics), including the Corporate Family Rating (CFR) to Ba2 from Ba1, Probability of Default rating to Ba2-PD from Ba1-PD and ratings of senior unsecured notes to Ba2 from Ba1. The ratings of NuStar Logistic's subordinated notes were downgraded to B1 from Ba2 and the ratings of preferred units issued at NuStar Energy L.P. were downgraded to B1 from Ba3. The outlook remains negative.

"NuStar's decision to simplify its ownership structure and to cut distributions to the common unit holders is a positive step to developing a capital structure that will enable a timely development of its Permian assets. However, NuStar's leverage will remain high and it depends on its $1.75 billion 2020 revolver, as well as support from the equity and debt markets to fund its cash flow outspend and distributions in the next two-three years," said Elena Nadtotchi, Moody's Vice President.

Downgrades:

..Issuer: NuStar Energy L.P.

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

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

....Pref. Stock Preferred Stock, Downgraded to B1(LGD6) from Ba3(LGD6)

..Issuer: NuStar Logistics L.P.

....Subordinate Regular Bond/Debenture, Downgraded to B1(LGD6) from Ba2(LGD6)

....Senior Unsecured Regular Bonds/Debentures, Downgraded to Ba2(LGD3) from Ba1(LGD3)

..Issuer: NuStar Energy L.P.

....Outlook, Remains Negative

..Issuer: NuStar Logistics L.P.

....Outlook, Remains Negative

Affirmations:

..Issuer: NuStar Energy L.P.

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

RATINGS RATIONALE

The downgrade of NuStar's ratings to Ba2 reflects the company's high leverage with debt/EBITDA at 6.2x in 2017 and the lower expectations for EBITDA growth in 2018 and 2019, which will result in leverage declining more slowly than previously expected. The rating also recognizes that the proposed cut in the distributions to common unit holders to around $250 million per year from $400 million in 2017, as well as payments to the holders of preferred units, assumed at $100 million, will keep FCF negative at $400 million in 2018. As NuStar is ramping up its investment in the development of the recently acquired Permian Crude System, we expect the company's FCF to remain substantially negative in the absence of further cuts in distributions in 2019 and 2020.

The Ba2 rating is materially supported by the assumption that the company will take proactive measures in early 2018 to execute on its financing plans for this year, including by issuing equity or preferred instruments and by making divestments. The Ba2 rating anticipates that these actions will allow NuStar to reduce leverage (debt/EBITDA) to below 5.5x, which Moody's considers more appropriate for the Ba2 rating.

Pending such actions, NuStar's liquidity profile is supported by its committed $1.75 billion revolver facility that matures in 2020. The credit facility is unsecured, but drawings are subject to a material adverse change clause. The credit facility has one financial covenant (debt/EBITDA of no greater than 5.0x from 2Q 2018). NuStar said that it was in compliance with the leverage covenant at the end of 2017, though compliance cushion will be tight during 2018, if the company needs to borrow under the facility pending equity funding or divestments. Supporting NuStar's liquidity profile is an unsecured capital structure and the corresponding flexibility to sell assets to raise cash.

In the near term, NuStar Logistics L.P. will need to refinance its 7.65% $350 million senior notes due in April 2018. The next significant maturity will be $450 million 4.80% senior notes due 2020.

Under Moody's Loss Given Default methodology, NuStar Logistics' unsecured notes are rated Ba2, reflecting a debt capital structure that is comprised of almost all unsecured debt. NuStar Logistics' various unsecured bonds and its 2020 revolving credit facility are unsecured and pari passu. NuStar Logistics' subordinated notes and NuStar Energy's preferred units are rated B1, two notches below the Ba2 CFR, reflecting their respective contractual and structural subordination to NuStar Logistics' debt obligations. If the revolver were to become secured or secured debt was added to the capital structure then the senior unsecured notes would likely be downgraded.

The Ba2 rating and the negative outlook take into account NuStar's recent track record of lowering its operating guidance, and lower than Moody's expected EBITDA ramp up on its Permian acquisition. The company aims to grow its 2018 EBITDA to $600 - $650 million (net of one time gains), compared to $595 EBITDA reported in 2017. NuStar will need to deliver strong growth in earnings from its Permian Crude System, to offset potential pressure on earnings from the rollover of 45-50% of contracts in the South Texas Crude system in 3Q 2018.

The negative outlook also factors risks associated with the timely execution of the financing plans in 2018. The outlook may be changed to stable if the company delivers on the financing plans, reduces leverage and increases the headroom for future compliance with the covenants in its revolver.

The ratings may be downgraded if the company is unable to deliver on its funding plans to issue equity instruments and make divestments, and reduce debt/EBITDA to 5.5x in 2018. A weakening in liquidity may also cause a downgrade in the ratings.

NuStar's ratings may be upgraded if the company delivers on growth potential of its $1.5 billion acquisition in the Permian Crude System, and lays the foundations of the financial framework which will allow it to maintain leverage sustainably below 4.5x debt/EBITDA, while pursuing further growth opportunities. Sound liquidity with higher covenant compliance headroom would be necessary to achieve an upgrade.

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.

Elena Nadtotchi
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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