Rating Action: Moody's rates EPIC Y-Grade's new term loan Caa2; outlook remains negative
New York, August 03, 2020 -- Moody's Investors Service ("Moody's") affirmed EPIC Y-Grade Services, LP's (EPIC Y-Grade) Corporate Family Rating (CFR) at Caa2 and Probability of Default Rating (PDR) at Caa2-PD/LD (/LD appended). Moody's downgraded the remaining senior secured Term Loan B due 2024 to Ca from Caa2. Moody's assigned a B1 rating to the senior secured revolver due 2025 and a Caa2 rating to the senior secured Term Loan B due 2027 . Moody's will withdraw the B1 rating of the revolver due 2023 and the Caa2 rating of the $75 million incremental term loan due 2024 following their termination. The outlook remains negative.
"The affirmation of EPIC Y-Grade's CFR and continued negative outlook reflects constrained liquidity in 2021 and still elevated leverage," said Jonathan Teitel, a Moody's Analyst. "However, the company is benefitting from recent debt repayment or conversion into equity, equity commitments and benefits from the sale of a joint interest in certain assets which support cash needs into 2021."
The appending of EPIC Y-Grade's PDR with an "/LD" designation indicates limited default for the exchange of loans into the new revolver and new Term Loan B. Moody's considers these to be distressed exchanges and therefore a default under its definitions. The LD designation will be removed shortly after this action.
EPIC Y-Grade's Caa2 CFR reflects elevated leverage and liquidity constraints in 2021. Cash needs through 2020 are supported by recent capital contributions, equity commitments and an asset sale though uncertainties around funding capital spending in 2021 persists. The company has flexibility on construction of its second fractionator but it would require additional capital which could potentially add further leverage to the company. With a fully used $40 million revolver, Moody's views EPIC Y-Grade's liquidity as weak given the uncertainties around capital funding in 2021 though the company gains relief on financial covenants that have been suspended into 2023.
EPIC Y-Grade's sale of a joint interest to BANGL, LLC (a consortium that includes MPLX LP and WhiteWater Midstream) is a source of cash in the near-term for the company to reinvest in its capital program. Full year EBITDA in 2020 will be very low and leverage will remain high in 2021. The asset sale will improve leverage since BANGL will make use of otherwise unused capacity on EPIC Y-Grade's system. EPIC Y-Grade's contracts are fixed fee and mostly long-term leaving the company with limited direct commodity price risk. However, only a portion of cash flow is underpinned by minimum volume commitments leaving the company exposed to volume risks in the weak commodity price environment and amid reduced upstream capital spending.
The company's revolver due 2025 (first in payment priority) is rated B1, its Term Loan B due 2027 (second in payment priority) is rated Caa2, the same as the CFR, and its Term Loan B due 2024 (now second in payment priority but becoming third in payment priority at the end of September) is rated Ca. The revolver's expiration will spring to February 2024 and the new Term Loan B's maturity will spring to March 2024, ahead of the existing Term Loan B due June 2024, to the extent that more than $50 million of the existing Term Loan B remains outstanding. The remaining lenders of the Term Loan B due 2024 have until September 30, 2020 to exchange their loans for the new Term Loan B due 2027, which could shift the composition of the capital structure, thereby increasing higher priority debt and decreasing lower priority debt. Moody's views the Caa2 rating of the Term Loan B due 2027 and the Ca rating of the Term Loan B due 2024 as more appropriate than the ratings suggested by Moody's loss given default with the present capital structure based on our expectations of the company's capital structure post September 30, 2020. As of July 31, about $659 million of the $950 million principal amount of pre-existing Term Loan B due 2024 exchanged into the new Term Loan B due 2027. Including the 1% fee payable in kind, initial commitments under the new Term Loan B due 2027 were about $666 million.
The negative outlook reflects risks around funding for capital needs in 2021, the prospect for additional debt, constrained EBITDA in 2020 and elevated leverage into 2021.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to a downgrade include erosion of liquidity, increased debt or increased risk of default.
Factors that could lead to an upgrade include improved liquidity including a funded capital program without incremental debt as well as significant growth in EBITDA and correspondingly lower leverage.
The principal methodology used in these ratings was Midstream Energy published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147839. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
EPIC Y-Grade Services, LP (a subsidiary of EPIC Y-Grade, LP) is a privately-owned midstream energy company with NGL pipelines running from the Permian Basin to Corpus Christi. EPIC Y-Grade is majority-owned by Ares Management with ownership stakes also held by Noble Midstream Partners and Salt Creek Midstream.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Jonathan Teitel, CFA AVP-Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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