Fitch Downgrades NuStar's Ratings to 'BB+'; Outlook Stable
NEW YORK -- August 27, 2012
Fitch Ratings has downgraded the ratings of NuStar Logistics, L.P. (Logistics)
and NuStar Pipe Line Operating Partnership, L.P. (NPOP), the operating
partnerships of NuStar Energy L.P. (NuStar), which is a publicly traded master
limited partnership (MLP). The rating Outlooks for Logistics and NPOP are
revised to Stable from Negative.
Fitch has taken the following rating actions:
--Long-term Issuer Default Rating (IDR) downgraded to 'BB+' from 'BBB-';
--Senior unsecured debt downgraded to 'BB+' from 'BBB-'.
--Long-term IDR downgraded to 'BB+' from 'BBB-';
--Senior unsecured debt downgraded to 'BB+' from 'BBB-'.
Approximately $1.6 billion of senior unsecured debt at the combined
partnerships is affected by today's rating actions.
The downgrade to 'BB+' reflects expectations for leverage to be above Fitch's
prior forecasts. For the LTM ending 2Q'12, leverage (defined as debt adjusted
for construction funds held in escrow to adjusted EBITDA) was 6.2x and Fitch
had previously forecasted 2012 year-end leverage to be approximately 4.3x.
Fitch revised forecast is 4.6x which includes the benefits to NuStar's balance
sheet with the pending asphalt joint venture. Fitch does not expect leverage
to drop to approximately 4.3x until the end of 2013.
Ratings concerns center on high leverage metrics, the potential for
accelerated acquisitions or increases of capital expenditures to make up for
the impaired growth prospects associated with the asphalt business, and to a
lesser degree, customer concentration from Valero Energy Corp. (IDR 'BBB' with
a Stable Outlook by Fitch). Fitch would be concerned if the sale of the 50%
stake in the asphalt joint venture did not occur, since it would likely result
in higher debt.
Factors which support the rating are NuStar's strong base of primarily
fee-based and regulated pipeline, terminalling and storage assets which
accounted for 80% of segment EBITDA in 2011, expectations for growth in EBITDA
in 2013 for all three segments, and sizeable and geographically diverse
assets. The planned joint venture for its asphalt operations will reduce
working capital requirements for NuStar and should improve liquidity.
Logistics and NPOP are wholly owned subsidiaries of NuStar. NuStar guarantees
the debt of Logistics and NPOP, and the debt instruments for the two operating
partnerships have cross defaults and cross guarantees which closely link the
NuStar's asphalt operations have been generating significant losses. The
company plans to move the assets into a joint venture and sell a 50% stake.
This is expected to reduce the MLP's volatility since the asphalt operations
do not generate steady cash flows. This will also significantly reduce
NuStar's working capital needs since the capital requirements for asphalt are
NuStar will provide the joint venture with an unsecured revolving credit
facility for working capital and other general corporate purposes for up to
$250 million. This will be subordinated to the asset backed loan that the
joint venture will establish as its main line of liquidity. Funds from
NuStar's loan to the joint venture will be used to fund approximately
one-third of the joint venture's working capital requirements. NuStar will
also provide guarantees or credit support for up to $150 million of operating
contracts assumed by the joint venture.
As of June 30, 2012 NuStar had $34 million of cash on the balance sheet. In
addition, it had $668 million of availability on its $1.5 billion revolver.
Revolver availability was due to an amendment which increased the maximum
leverage ratio from 5.5x to 6.5x as of 2Q'12.
The company's $1.5 billion revolving credit facility expires in 2017. This
facility was established in May 2012 and replaced a $1.2 billion revolver.
Before the end of 2Q'12, NuStar had to obtain a waiver from lenders for a
financial covenant which capped leverage (as defined in the bank agreement) at
5.5x. Leverage is to be no greater than 5.0x except for 2Q of each year when
it is allowed to rise to 5.5x due to the seasonality of working capital
requirements of the asphalt operations. Lenders consented to a maximum
leverage of 6.5x at the end of 2Q'12 and the actual result for the bank's
leverage calculation was 6.0x.
For 3Q'12, the maximum leverage ratio was increased to 6.0x and in 4Q and
beyond, it is 5.0x (except for 2Q of any year). If the asphalt operations are
sold, leverage cannot exceed 5.0x at the end of each quarter. If NuStar makes
acquisitions which exceed $50 million, the bank defined leverage ratio
increases to 5.5x from 5.0x for two consecutive quarters.
In July 2012, $100 million of notes matured. In December 2012, the 21 million
UK 6.65% term loan is due. In 2013, $230 million of notes are due in March and
$250 million are due in June.
Capital expenditures have been increasing. In 2011, capex was $336 million.
NuStar has stated that in 2012, strategic capex is to be in the range of $425
million to $475 million and reliability capex is to be $45 million to $50
million. Fitch expects capital expenditures to remain significant as the MLP
seeks to grow its storage and terminal operations.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Significant leverage reduction. Should leverage fall below 4.0x for a
sustained period of time, Fitch may take positive rating action.
Negative: Future developments that may, individually or collectively, lead to
a negative rating action include:
--Failure to close on the sale of the 50% stake in the asphalt joint venture;
--Further deterioration of EBITDA;
--Significant increases in capital spending or acquisitions which have
negative consequences for the credit profile;
--Increased leverage beyond 5.0x for a sustained period of time.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Pipelines, Midstream, and MLP Stats Quarterly - First Quarter 2012' (July
--'Top Ten Questions Asked by Pipeline, Midstream, and MLP Investors' (May 21,
--'Liquidity Review: Pipelines, Midstream, and MLPs' (Dec.28, 2011);
--'Master Limited Partnerships 101: Assessing MLPs in a High-Growth
Environment' (Nov. 1, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Pipelines, Midstream, and MLP Stats Quarterly -- First-Quarter 2012
Liquidity Review: Pipelines, Midstream, and MLPs
Master Limited Partnerships 101
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