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16 Mar 2011
Approximately $725 million of debt securities affected
New York, March 16, 2011 -- Moody's Investors Service upgraded Crosstex Energy, L.P.'s
Corporate Family Rating (CFR) to B1 from B2 and upgraded the ratings on
its senior unsecured notes to B2. The company's SGL-3
Speculative Grade Liquidity rating remains unchanged. The rating
outlook is stable.
"The ratings upgrade reflects Crosstex's improved financial
leverage metrics and the expected conservative management of its distribution
policies and capital spending program," commented Gretchen
French, Moody's Vice President -- Senior Analyst.
RATINGS RATIONALE
Crosstex's B1 CFR is supported by the relatively high proportion of its
gross margin that is considered non-commodity based and management's
conservative business strategy in recent years, which we expect
to remain in place as the company pursues growth opportunities.
The rating also reflects the company's improved financial leverage
following significant debt reduction in 2009 and 2010. The CFR
is restrained by Crosstex's high level of exposure to the relatively
mature Barnett Shale, and inherent volume and price risk in gathering
and processing natural gas. The rating also considers management's
prior history of more aggressive financial policies, and risks inherent
to the MLP business model.
Since the fourth quarter of 2008, Crosstex's management has
pursued a more conservative business strategy than in prior years,
focusing on improving financial flexibility and enhancing profitability.
The company temporarily suspended distributions and then reinstated unitholder
payments at lower levels, sold over $600 million in assets
with the proceeds primarily used to repay debt, sharply cut back
capital spending and improved its cost structure. These financial
policies contrast to the company's prior track record, where
management pursued an aggressive growth strategy, with high multiples
paid for acquisitions, elevated capital spending levels, high
distribution growth rates and funding falling short of management's 50%
equity financing target.
Through asset sales, Crosstex has reduced its debt burden by approximately
$550 million since the end of 2008, significantly improving
its leverage profile. Debt/EBITDA has declined to 4.3x (as
adjusted for Moody's standard adjustments) from 6.9x during
this time frame and has gravitated towards the company's publicly
stated target of 4x. The current leverage profile is more closely
aligned with Crosstex's ratings given its size, revenue mix
and geographic concentration.
With the recent reinstatement of distributions, we expect Crosstex
will look to grow distributions through acquisitions and organic growth
projects, including expanding into new geographic areas, exposing
investors to event, integration and financing risks. For
2011, the company has increased its growth capital budget to between
$50 million and $150 million, with growth targeted
in a number of emerging liquids-rich shale plays, as well
as bolt-on projects related to the company's existing infrastructure.
However, with Crosstex's currently relatively strong distribution
coverage ratio (1.6x in the fourth quarter of 2010) and commitment
to maintaining leverage around current levels, we expect that the
company's credit metrics will remain supportive of the B1 CFR.
The stable outlook reflects our view that over the next 12 to 18 months,
the company will continue to exercise capital discipline and manage its
distributions and liquidity in a prudent manner. The outlook assumes
that any major capital project or acquisition will have a substantial
equity funding component.
Given today's upgrade, positive rating action is unlikely
over the near term. However, an upgrade or positive outlook
is possible over the medium to longer term if Crosstex demonstrates that
it can consistently maintain leverage around 4x, and at the same
time maintain a high proportion of more durable fee based revenues as
it pursues growth projects. Operational and cash flow diversification
through a sustainable presence in geographical areas outside of the Barnett
would also be viewed positively.
The rating would come under pressure if Crosstex's operating performance
shows a substantial weakening trend making its leverage unsustainable
under 5x. A negative outlook or an outright downgrade could also
result due to poor liquidity or a significant leveraging transaction.
The B2 rating on the senior notes reflects both the overall probability
of default of Crosstex, to which Moody's assigns a PDR of
B1, and a loss given default of LGD 4 (68%). The company
has a committed $420 million senior secured revolving credit facility.
The notes are unsecured and are subordinate to the senior secured credit
facility's potential priority claim to the company's assets.
The size of the potential senior secured and other structurally superior
claims relative to the unsecured notes results in the notes being notched
one rating beneath the B1 CFR under Moody's Loss Given Default Methodology.
The principal methodologies used in this rating were Global Midstream
Energy published in December 2010, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
Crosstex Energy, L.P., headquartered in Dallas,
Texas, is a publicly traded master limited partnership engaged in
the gathering, processing, transmission and marketing of natural
gas and natural gas liquids.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and
confidential and proprietary Moody's Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
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independent third-party sources. However, Moody's
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validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Gretchen French
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Steven Wood
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades Crosstex Energy to B1 CFR
No Related Data.
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