Sunoco Logistics Partners (SXL) Ratings Places on Review for Downgrade by Fitch
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Fitch Ratings has placed Sunoco Logistics Partners L.P. (NYSE: SXL) and its operating partnership, Sunoco Logistics Partners Operations L.P. (both entities collectively referred to as Sunoco Logistics) on Rating Watch Negative. This action follows Sunoco Logistic's announcement that it would acquire Energy Transfer Partners, LP (Energy Transfer Partners; 'BBB-'/Outlook Stable) in a unit-for-unit transaction.
Fitch has placed the following ratings on Rating Watch Negative:
Sunoco Logistics Partners L.P.
--Long-Term Issuer Default Rating (IDR) 'BBB'.
Sunoco Logistics Partners Operations L.P.
--Long-Term IDR 'BBB;
--Senior unsecured debt 'BBB';
--Senior unsecured bank facilities 'BBB';
--Short-Term IDR 'F2';
--Commercial Paper (CP) 'F2'.
Debt issued by Sunoco Logistics Partners Operations L.P. is guaranteed by Sunoco Logistics Partners L.P. Approximately $6 billion in debt is affected by today's rating action.
KEY RATING DRIVERS
Sunoco Logistics' rating is on Rating Watch Negative following the pending acquisition of lower rated Energy Transfer Partners. While Sunoco Logistics will increase significantly in size and scale, the transaction will also raise leverage, which has already been high. After the transaction closes, Fitch anticipates that leverage will remain elevated for several quarters. Previously, Fitch anticipated that leverage would be reduced to below 4.5x in 2017. With the pending transaction, Fitch now projects leverage to be just under 5.0x by the end of 2017. Since leverage at the partnership had already been high, Fitch has previously noted that negative rating action would occur if leverage was not reduced to below 4.5x.
Fitch will resolve the Rating Watch Negative at or near the closing of the merger. The most likely scenario is that the rating will be downgraded one notch to 'BBB-' given expectations for leverage to remain high. While not expected, the existing ratings may remain in place if leverage is forecasted by Fitch to be under 4.5x on a sustained basis.
Sunoco Logistics is making the acquisition by exchanging 1.5 common units of Sunoco Logistics for each common unit of Energy Transfer Partners. Debt at Energy Transfer Partners will be assumed by Sunoco Logistics. The transaction is expected to close during the first quarter of 2017 subject to Energy Transfer Partners unitholder approval and other customary conditions. Upon completion of the merger, the combined entity will be named Energy Transfer Partners.
Sunoco Logistics and Energy Transfer are both master limited partnerships (MLPs) in the Energy Transfer Equity LP (Energy Transfer Equity) family. The combination of the two MLPs will help simplify the structure at Equity Transfer Equity. In addition, management has forecasted $200 million of commercial synergies and cost reductions by 2019. With Energy Transfer Partner's distributions being reduced to Sunoco Logistics' distributions, the combined entity will have additional retained cash available for spending. Additionally, the combined entity will become the second largest MLP with a strong focus in core areas such as the liquids-rich Permian and the natural gas shale plays in the Marcellus and Utica. There will also be a strong presence in the Gulf Coast.
Concerns are focused on Sunoco Logistics leverage, which has been high and will continue to be elevated once the transaction closes. Leverage has been ramping up given the partnership's growth spending. The ability to achieve the full $200 million of synergies by 2019 is also uncertain. Given the need for Energy Transfer Partners' unitholder approval of the transaction, execution risk also exists. Once the pending merger closes, Fitch believes there is uncertainty as to what additional simplification measures Energy Transfer Equity may make given its stated goal of increasing simplicity in its structure.
Additional concerns include the pending sale and completion of construction on Sunoco Logistics and Energy Transfer Partner's Bakken pipeline project. The Bakken projects are currently subject to increased regulatory uncertainty and further potential delays. These uncertainties have the potential to negatively impact Sunoco Logistics' credit profile, particularly, if the sale of the interest in the pipeline does not get completed, though Fitch currently views this potential as remote.
Fitch's key assumptions within the rating case for Sunoco Logistics include the following:
--The pending transaction with Energy Transfer Partners occurs as planned and the transaction closes in the first quarter of 2017;
--Leverage at year-end 2017 is just below 5.0x; Fitch expects leverage to decline in the following two years.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Positive rating action would occur if Fitch anticipated that leverage (defined as debt-to-adjusted EBITDA) would be below 4.5x on a sustained basis. Should the transaction close as planned, positive rating action is not anticipated since leverage has already been trending above 4.5x for a number of quarters.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Leverage in excess of 4.5x on a sustained basis. If the acquisition of Energy Transfer Partners occurs as planned, Fitch expects the rating to be downgraded one notch to 'BBB-'.
Sunoco Logistics has sufficient liquidity in the near term. At the end of 3Q16, it had over $1.9 billion of liquidity which consisted of $39 million of cash and approximately $1.8 billion undrawn on its revolver due 2020. The partnership has a $2.5 billion commercial paper program that is backed by the revolving credit facility.
The revolver limits leverage (as defined by the bank agreement) to 5.0x at the end of each quarter. With certain acquisitions, leverage could temporarily increase to 5.5x. The bank definition of EBITDA gives pro forma credit for acquisitions and material projects. The definition of debt carves out borrowings used for contango trades up to $500 million.
As of the end of 3Q16, bank defined leverage was 3.6x, leaving significant cushion for the bank covenant. In May 2016, Sunoco Logistics paid off $175 million of debt that became due. Future maturities are manageable and the next bond maturity is $250 million due in 2020.
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