NEW YORK--(BUSINESS WIRE)--Mergers and acquisitions will likely continue as the cost of capital, project backlogs, and rising interest rates remain issues for master limited partnerships (MLPs), Fitch Ratings says.
The Williams Companies Inc.'s (WMB) announcement this week that the company will acquire its MLP, Williams Partners L.P. (WPZ) will create a stronger credit profile for the combined WMB/WPZ entity. Fitch placed WMB's ratings on Rating Watch Positive, in response. One of the drivers of the planned merger is the cost of capital at WPZ, which has become a broader concern for issuers in the midstream space. Other recent transactions that occurred to improve the cost of capital include Energy Transfer Partner, L.P.'s acquisition of its affiliate MLP, Regency Energy Partners L.P. in April 2014 and Kinder Morgan Inc.'s acquisition of its MLP's in November 2014.
The recent Williams transaction highlights the effect that incentive distribution rights (IDR) paid to the general partner can have on equity cost of capital for mature MLPs. However, we do not view this as a repudiation of the MLP structure as capital markets remain open to it, despite the challenging commodity price environment.
Fitch initially thought mergers to alleviate IDR burdens and MLP conversions would be limited to Kinder Morgan (KMI; BBB-/Stable Rating Outlook) since it had a relatively unique situation. However, the success and positive equity response that the KMI and the WMB/WPZ transactions have had could lead to other MLP issuers following suit.
Cuts from exploration and production capital spending over the past several months, following the decline in commodity prices in November 2014, are also pressuring midstream firms. Over the longer term, if production volumes are reduced, it could lead to slower growth and hurt volume-sensitive issuers or lead to a significant declines and/or delays in planned growth projects.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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