Fitch Assigns Initial 'BBB-' Rating to Buckeye; Rates Proposed Sr. Unsecured
NEW YORK -- November 6, 2013
Fitch Ratings has assigned an initial Issuer Default Rating (IDR) and senior
unsecured rating of 'BBB-' to Buckeye Partners, L.P. (Buckeye). Fitch also
expects to rate Buckeye's planned issuance of new senior unsecured notes due
2018 and 2043 'BBB-'. Proceeds from the bond offering are to be used to
prefund a pending acquisition and for general partnership purposes.
The Rating Outlook is Stable.
KEY RATINGS DRIVERS
The 'BBB-' rating is supported by the company's size, geographic diversity,
and ability to invest in growth opportunities that should drive increases in
EBITDA and distributable cash flows. Past acquisitions and strategic growth
capex initiatives have already proven to create EBITDA growth, and the company
has been able to reduce leverage significantly since the end of 2012.
Fitch believes that the company's announced acquisition of $850 million of
terminal assets from Hess Corporation (IDR 'BBB'/Stable Outlook) is a good
strategic fit with Buckeye's existing footprint. While leverage is expected to
temporarily increase as the company raises debt to fund this deal, Buckeye has
already raised $382 million of equity in the first nine months of 2013 and
another $521 million in October. Those proceeds were to partially prefund the
acquisition indicating management's willingness to balance its funding
Concerns include integration risk of the pending large acquisition, leverage
which is expected to temporarily increase (but on a pro forma basis should
remain close to 4.5x and longer term should decrease as a result of EBITDA
growth), increases in capex for strategic growth projects, and distribution
coverage which may fall slightly below 1.0x over the next few quarters.
Proposed Notes: As previously mentioned, proceeds from the debt offering are
to be used for prefunding of the assets to be acquired from Hess and for
general partnership purposes. Should the acquisition not occur before July 9,
2014 (or if Buckeye elects to extend the date through Jan. 9, 2015), Buckeye
is required to redeem all of the 2018s at 101%.
Pending Acquisition: In October 2013, the company announced the acquisition of
liquids petroleum terminals from Hess for $850 million. The terminals are
located along the east coast and in the Caribbean. In the northeast, the
assets will enable Buckeye to expand its position in New York Harbor. In the
Caribbean, the assets to be acquired complement its existing position in the
Bahamas. Furthermore, Buckeye is expected to have opportunities to expand the
customer base for the terminals since Hess has operated them primarily as
proprietary assets. The transaction is expected to close by yearend 2014.
Hess has committed to being an anchor tenant for four years on the domestic
terminals. Buckeye estimates Hess's contracts will account for approximately
25% of total EBITDA from the assets to be acquired.
Leverage: Following significant acquisitions in early 2011, leverage (defined
by Fitch as total debt to adjusted EBITDA) rose from 4.7x at the end of 2010
to 5.4x at the end of 2011 then declined to 5.3x at the end of 2012. Leverage
was reduced by approximately one turn to 4.2x as of June 30, 2013. It was 4.6x
as of Sept. 30, 2013. With the announced acquisition, leverage may return to
approximately 5.0x by year end 2013, but on a pro forma basis it should be
under 4.5x. Fitch projects it will be in the range of 4.0-4.25x by the end of
Acquired assets have contributed to EBITDA growth and Buckeye has the
opportunity to reposition assets and expand existing ones. EBITDA should
continue to grow. These strategic moves coupled with equity issuance have
enabled the company to reduce leverage. Furthermore, the company is dedicated
to keeping healthy credit metrics and has demonstrated its commitment with
Liquidity: As of Sept. 30, 2103, Buckeye had $5 million of cash on the balance
sheet. In addition, it had $663 million undrawn on the $1.25 billion credit
facility. Availability on the revolver benefited from the June issuance of
$500 million of notes since proceeds were used to decrease revolver
borrowings. In July 2013, it used the revolver to repay $300 million of
In September 2011, BPL entered into a $1.25 billion senior unsecured revolver
due 2016. Under the terms of the bank agreement, BPL's indirect wholly owned
subsidiary, Buckeye Energy Services LLC (BES), has a sublimit of $500 million
for borrowings which are used for working capital needs.
The credit agreement states that BES shall not be held jointly and severally
liable for any obligations of Buckeye for the credit agreement or other debt.
At the end of any fiscal quarter, leverage (as defined by the bank agreement)
cannot exceed 5.0x. If an acquisition is $50 million or more in one quarter or
if acquisitions are $100 million or more over a 12 month period, then leverage
cannot exceed 5.5x for that quarter and the two following quarters. At the end
of 3Q'13, bank defined leverage was 4.2x.
For the bank defined leverage ratio, 'consolidated funded debt' allows for
exclusion of BES's letters of credit and revolver borrowings. Like other
MLP's, the bank definition of EBITDA allows for a pro forma adjustment for
Fitch expects Buckeye will continue to generate credit ratios which provide it
with sufficient covenant cushion for the bank agreement. Buckeye does not have
any debt maturities until 2014 when $275 million of notes are due. With access
to capital markets and availability on the revolver, Fitch expects Buckeye to
have adequate liquidity to meet its spending needs.
Diverse operations: Buckeye's assets are reasonably diverse although the
domestic pipelines and terminals segment dominates contributions to earnings.
For the LTM ending 2Q'13, that segment contributed 72% of adjusted EBITDA
while international pipelines and terminals contributed to 23% and Buckeye
Services contributed 5%.
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Significant leverage reduction. Should leverage fall below 4.0x over 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:
--Deterioration of EBITDA which could result from the energy services segment,
but growth in other segments is expected to offset any potential issues at the
energy services segment;
--Inability to meet growth expectations associated with the pending
acquisition or with expansion projects given the substantial investments in
the prior acquisitions of BORCO and Perth Amboy;
--Significant increases in capex or acquisitions not funded in a balanced way;
--Increased adjusted leverage beyond 5.5x for a sustained period of time and
distribution coverage below 1.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Crossovers Credits in Natural Resources - Migration Catalysts 2003-2013'
--'Pipelines, Midstream, and MLP Stats Quarterly - Second Quarter 2013'
--'Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP
Sectors' (August 2013);
--'Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs' (April
--'Corporate Rating Methodology' (August 2013);
--'2013 Outlook: Crude Oil and Refined Products Pipelines' (November 2012);
--'Master Limited Partnerships 101' (November 2011).
Applicable Criteria and Related Research:
Investor FAQs: Recent Questions on the Pipeline, Midstream, and MLP Sectors
Tax Event Risk and MLPs: Assessing a Change in Tax Status for MLPs
Crossover Credits in Natural Resources - Migration Catalysts 2003-2013
Pipelines, Midstream, and MLP Stats Quarterly -- Second-Quarter 2013
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
2013 Outlook: Crude Oil and Refined Products Pipelines
Master Limited Partnerships 101
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Fitch Ratings, Inc.
One State Street Plaza
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Brian Bertsch, New York, +1 212-908-0549
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