Icahn Enterprises L.P. (IEP) May Be Cut Junk at S&P

February 19, 2016 1:25 PM EST

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(Updated - February 19, 2016 1:29 PM EST)

Icahn Enterprises L.P. (NASDAQ: IEP) may be cut to junk by S&P. The firm cited the declining investment values of the portfolio that they believe have very likely led to the firm exceeding a 45% loan-to-value (LTV) ratio. The firm, in part, noted the declining value of portfolio investments in commodity-related stocks, including: Chesapeake (NYSE: CHK), Cheniere (NYSE: LNG), and Freeport-McMoRan (NYSE: FCX).

Below is the announcement from S&P:

Standard & Poor's Ratings Services said today it placed its 'BBB-' issuer credit rating on Icahn Enterprises L.P. on CreditWatch with negative implications. We also placed our 'BBB-' issue rating on the company's senior unsecured debt on CreditWatch with negative implications.

"The CreditWatch action reflects declining investment values in the firm's portfolio that we believe have very likely led to the firm exceeding a 45% loan-to-value (LTV) ratio, which we previously cited as a key threshold for the rating," said Standard & Poor's credit analyst Clayton Montgomery. Through Feb. 18, 2016, we estimate that the firm has lost at least $1.4 billion in value versus investment values as of Sept. 30, 2015. Although we only have good visibility on the firm's publicly traded majority holdings (since the hedge fund is hedged and can change exposures during the quarter and other holdings are private), we also believe that the hedge fund may have also lost value in the fourth quarter and so far in 2016 due to declining markets and the significant deterioration in commodity-related investments (including Chesapeake, Cheniere, and Freeport-McMoRan).

The firm's LTV ratio could benefit from the successful sale of Fontainebleau over the near to medium term. However, given the magnitude of the decline in the portfolio, this will likely not improve the company's LTV ratio to back below the 45% threshold. Furthermore, we believe that the firm may redeploy those proceeds back into investments, which would be less beneficial to the firm's LTV ratio than if management kept proceeds in cash. We net all of Icahn's cash against debt in our leverage calculation.

The firm has started to maintain less cash at the holding company than it has historically. Our historical assumption was that the firm would maintain over $500 million in cash based on statements made by management and the firm's behavior over time. As of Sept. 30, 2015, cash was only $182 million, down from $1.1 billion a year earlier. We believe that cash provides a very visible source of repayment for the firm's debt obligations, especially given the firm's relatively weak income stream that it receives from a few portfolio companies. Thus we view this deterioration negatively. Icahn's next debt maturity is $1.175 billion in senior unsecured notes due in January 2017, which we believe the company has the ability to repay if needed. However, at this point, we view it as more likely that the firm will refinance this maturity.

We believe it is possible that Carl Icahn, the majority shareholder of IEP and Chairman of the Board, could support the company's capitalization at some point in the future through an equity raise. We don't include the assumption of support in the rating, but nonetheless it is a possibility that could improve the firm's leverage ratio and creditworthiness. As of Sept. 30, 2015, Mr. Icahn owned 88.8% of Icahn units. We would view an equity offering positively since it would result in deleveraging, but portfolio deterioration may still outweigh the benefit of this action, if it were to occur.

The CreditWatch listing indicates that we believe there is at least a one-in-two likelihood that we may lower the ratings within the next 90 days. We expect to resolve this listing once we observe more price action in the firm's publicly traded holdings, we get more clarity on how the firm's hedge fund has performed, and we more clearly understand the firm's leverage tolerance. We could lower our rating by one notch if we observe a sustained LTV between 45%-60% with no credible path to improvement. Conversely, we could revise the outlook to stable if we believe the firm will deleverage and sustain a LTV ratio below 45%.

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