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Rating Action:

Moody's downgrades SemGroup and HFOTCO on close of acqusition

Global Credit Research - 17 Jul 2017

Approximately $1.6 billion of debt affected

New York, July 17, 2017 -- Moody's Investors Service, (Moody's) downgraded SemGroup Corporation (SEMG)'s Corporate Family Rating (CFR) to B2 from B1, its Probability of Default Rating (PDR) to B2-PD from B1-PD, and its senior unsecured notes rating to B3 from B2. Moody's affirmed SEMG's SGL-3 Speculative Grade Liquidity Rating. The outlook is stable. At the same time, Moody's downgraded HFOTCO, LLC's senior secured bank credit facility rating to Ba3 from Ba2 and assigned HFOTCO a Ba3 Corporate Family Rating and a Ba3-PD Probability of Default Rating. The outlook is stable.

The rating actions follow SEMG's acquisition of Buffalo Parent Gulf Coast Terminals LLC (unrated), which wholly owns HFOTCO, from Alinda Capital Partners (Alinda) for $2 billion using a mix of debt and equity. Of this amount, $1.4 billion was funded at close (including $760 million of existing debt remaining in place at HFOTCO) with the remaining $600 million payment due December 31, 2018.

"Despite the strengthening of SEMG's business profile through the addition of HFOTCO's stable crude oil and residual fuels terminal business, characterized by take-or-pay contracts with strong counterparties and an advantaged location, pro forma consolidated leverage will spike and remain elevated through 2018," said John Thieroff, Moody's Vice President. "Leverage is not expected to fall below 6x until 2019 at the soonest."

A complete list of Moody's rating actions is as follows:

..Issuer: SemGroup Corporation

Downgrades:

.... Probability of Default Rating, Downgraded to B2-PD from B1-PD

.... Corporate Family Rating, Downgraded to B2 from B1

....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 (LGD 4) from B2 (LGD 5)

Affirmations:

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

Outlook Action:

....Outlook, changed to Stable from Rating Under Review

..Issuer: Rose Rock Midstream, L.P.

Downgrades:

....Senior Unsecured Regular Bond/Debentures, Downgraded to B3 (LGD 4) from B2 (LGD 5)

..Issuer: HFOTCO, LLC

Downgrades:

. Senior Secured Bank Credit Facility, Downgraded to Ba3 (LGD 4) from Ba2

Ratings Assigned:

. Corporate Family Rating, Assigned Ba3

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

Outlook Action:

....Outlook, Changed to Stable from Rating Under Review

RATINGS RATIONALE

SEMG's B2 CFR reflects a highly leveraged balance sheet, a disparate mix of largely non-correlated assets and an improving business risk profile stemming from the company's growing refinery-facing businesses on the Gulf Coast. EBITDA growth is expected at SEMG and its unrestricted subsidiary HFOTCO in the near term as projects currently under construction come online. In particular, the Maurepas Pipeline which is expected to be placed in service in the third quarter of 2017 and benefits from a long-term take-or-pay contract with Shell Oil Company. The HFOTCO acquisition increases SEMG's percentage of gross margin that is take-or-pay to 52% pro forma, up from about 40% at year-end 2016. SEMG's also benefits from a further skew toward crude oil and refined crude products. HFOTCO represents a second significant step in SEMG's efforts to establish a presence on the Gulf Coast, although HFOTCO does not provide physical integration or direct overlap with SEMG's other businesses. SEMG's reliance on its revolver to fund capital spending and expected capital contributions at HFOTCO as well as a $600 million deferred payment related to the HFOTCO acquisition due at year-end 2018, will keep leverage elevated with Debt/EBITDA at year-end 2018 above 6x. Targeted annual dividend growth of 10% diminishes SEMG's capacity to internally fund its growth capital projects, although dividend coverage is expected to remain satisfactory.

HFOTCO'S Ba3 CFR reflects its advantaged location, diverse mix of high-credit quality counterparties offset by high leverage and its ownership by SEMG. HFOTCO's residual fuel oil and crude oil storage terminals operate on the Houston Ship Channel, with good connectivity to local refineries, truck and rail loading and ample ship and barge docking. The company's crude expansion project, scheduled to be completed in 2018, is expected to be a significant driver of EBITDA growth over the next several years. HFOTCO continues to enjoy strong relationships with its counterparties and has been able to rollover the large majority of contracts at expiration, most of which range from three to five years in duration. Debt to EBITDA, expected to be 7x at year-end 2017, should improve to less than 6x by year-end 2018 due to improved cash flow from the crude expansion; however, HFOTCO is expected to pay out all of its distributable cash flow to SEMG. Although SEMG will contribute cash to HFOTCO for capital projects, distributions from HFOTCO will be an essential component of SEMG reaching its aggressive dividend growth target.

The B3 rating on SEMG's senior unsecured notes reflects their subordinate position relative to the company's $1 billion secured credit facility in the capital structure. The potential priority secured claim of the revolver relative to the notes results in the unsecured notes being rated one notch beneath the B2 CFR under Moody's Loss Given Default Methodology.

The Ba3 rating on HFOTCO's senior secured credit facility is the same as the Ba3 CFR. Although the credit facility ranks behind HOFTCO's $225 million super senior Hurricane Ike bonds in liquidation preference, the size of the bonds is relatively small. Accordingly, we believe the Ba3 rating is more appropriate than what is suggested by Moody's Loss Given Default methodology.

SEMG's SGL-3 Speculative Grade Liquidity Rating reflects adequate liquidity through mid-2018, supported by $875 million available under its credit facility and $66 million of balance sheet cash, both as of March 31, 2017. We expect that the company will rely heavily on its revolving credit facility to fund its substantial capital spending program through 2018. The credit facility expires in March 2021 and is governed by three financial covenants: leverage of no more than 5.5x, interest coverage of no less than 2.5x, and senior secured leverage of no more than 3.5x. These covenants do not consider HFOTCO's debt or interest expense. We expect that the company will remain in compliance with these covenants through mid-2018. Dividend coverage is expected to be adequate through 2018 at 1.3x after subtracting maintenance-level capital spending. Following completion of the proposed tender and repayment of SemGroup's 2021 notes issue, the next maturity will be the $400 million senior unsecured notes due in 2022.

HFOTCO's adequate liquidity is underpinned by its $75 million senior secured revolver. HFOTCO is undergoing a significant crude expansion and will draw heavily on its revolver to fund a portion of the related spending through 2018, although it is expected to maintain sufficient availability to cover working capital needs. While HFOTCO will pay out all of its distributable cash flow, SEMG is expected to contribute necessary capital to HFOTCO to cover capital spending shortfalls. The revolver matures in August 2019; the term loan in August 2021.

SEMG's stable outlook reflects Moody's expectation that near-term cash flow growth will allow the company to begin deleveraging by late 2017. Ratings would likely be downgraded if year-end 2018 leverage is expected to be above 7x. Ratings could be upgraded if debt/EBITDA appears sustainable below 6x and dividend coverage is maintained above 1.2x.

HFOTCO's stable outlook reflects the consistent nature of the company's operations and that growth through 2018 can be funded without a significant increase in debt. Debt/EBITDA above 7.5x would likely lead to a downgrade; a downgrade of SEMG could also lead to a downgrade of HFOTCO. Ratings are unlikely to be upgraded without an upgrade of SEMG.

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.

Tulsa, Oklahoma-based SemGroup owns a diverse suite of midstream assets focused on the gathering, processing, transportation, and storage of crude oil and natural gas across several major North American oil and gas basins. As of December 31, 2016 the company had total assets of $3.1 billion.

Houston, Texas- based HFOTCO is one of the largest providers of residual fuel and crude oil storage in the U.S. Gulf Coast with approximately 16.8 million barrels of tankage. HFOTCO provides additional ancillary services and optionality for its customers, including product heating, blending and transportation services for regional refiners, major integrated oil companies and trading operations.

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.

John Thieroff
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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