NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded LOOP LLC's ratings as follows:
--Long-term Issuer Default Rating (IDR) to 'BBB+' from 'A-';
--First-stage deepwater port revenue bonds and refunding revenue bonds (first-stage debt) to 'A-' from 'A';
--Deepwater port refunding revenue bonds (unsecured debt) to 'BBB+' from 'A-';
--Senior unsecured debt to 'BBB+' from 'A-';
--Short-term IDR to 'F2' from 'F1';
--Commercial paper to 'F2' from 'F1'.
Approximately $206 million of first-stage debt and $221 million of unsecured debt is affected by this rating action. The Rating Outlook is Stable.
The downgrade reflects Fitch's expectations for increased leverage as throughput volumes decline at LOOP (Louisiana Offshore Oil Port) import facilities over the next couple of years. The 'BBB+' rating reflects its standalone credit profile absent the direct enhancement provided to first-stage debt through the throughput and deficiency (T&D) agreements from the owners.
The ratings are supported by LOOP's strategic position as the only deep-water port in the U.S. capable of offloading ultra-large crude carriers and very large crude carriers that are too large to access inland port facilities. LOOP's owners are U.S. subsidiaries of Royal Dutch Shell plc (46.1%; IDR 'AA', Stable Outlook by Fitch), affiliates of Marathon Petroleum Corp. (50.7%), and Valero Corp. (3.2%; IDR 'BBB', Stable Outlook).
In addition, the ratings consider LOOP's strategically located assets in the Gulf Coast. In 2012, LOOP imported 10% of all crude imports into the U.S. and over 5% of domestic crude capacity travelled on its system.
Rating concerns center on expectations for higher leverage which is forecasted to occur as a result of lower throughput volumes over the next couple of years. Gulf coast crude oil imports have been unfavorably impacted by the North American shale revolution, which has sharply raised the availability of discounted Canadian and interior shale crude oils in the Midwest and the Gulf Coast, in turn displacing the need for waterborne imports transported through LOOP facilities.
Specific projects which will impact LOOP volumes include Shell's reversal of a Houma, LA to Houston, TX pipeline, ('Ho-Ho Reversal') which will increase gulf coast refiner access to shale crudes in the near term, further pressuring LOOP volumes. Ultimately, the pending Westward Ho project should benefit LOOP's throughput volumes as crude shipped on its system will have more market access but this is not expected to be in service until 2016. Additional pipeline reversals which could further impact LOOP's volumes are also possible, including a potential reversal of the 1.2 million bpd Capline Pipeline. These changes in LOOP's operating environment are likely to result in lower EBITDA and increased leverage.
First-Stage Debt
The 'A-' rating for the first-stage debt reflects the benefits stemming from the right these bondholders have to receive payments under T&D agreements with LOOP's owners. The T&D obligors are required to ship or cause to be shipped enough oil to enable LOOP to meet its operating expenses and debt service on all first-stage debt according to their pro-rata share of ownership. Alternatively, the owners severally agree to make cash payments to LOOP for any deficiency in meeting these obligations in exchange for a credit for future throughput. In addition, a portion of the first-stage debt is backed by irrevocable letters of credit which provides additional credit enhancement to specific tranches.
Unsecured Debt
While LOOP's 'BBB+' unsecured debt ranks pari passu with first-stage debt, it does not share in the additional credit support provided by the T&D agreements and LC backing. Fitch expects that throughput volumes from non-owner shippers will continue to provide sufficient cash flow to support LOOP's non-T&D backed debt. In 2012, third party volumes accounted for 36% of import throughputs. Import throughputs accounted for 75% of LOOP's overall throughput.
Leverage
At the end of 1Q13, leverage was 3.8x. Over the last few years, it has been in the range of 3.8 to 4.3x. Fitch expects EBITDA to be negatively impacted by lower volumes from competition with shale crude and Shell's Ho-Ho Reversal project beginning in 2013 and for leverage to increase to a range of 5.5-6.0x over the next couple of years.
Liquidity
As of the end of 1Q13, LOOP had $33 million of cash on the balance sheet. In addition it has a $50 million revolver which extends until December 2015. There are no debt maturities until $100 million of T&D bonds come due in 2014. Fitch notes that the company has made significant discretionary distributions to owners and has the ability to limit these to improve liquidity if needed.
Storage Expansion
In 2012, LOOP completed an above-ground storage capacity expansion project at its Clovelly, Louisiana tank farm (CTF). Three new 600,000-barrel above-ground storage tanks were placed into service. The CTF consists of 15 above-ground 600,000-barrel storage tanks. Storage revenues are projected to increase modestly as the additional storage supply improves the potential for arbitrage opportunities for LOOP's shippers.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Significant leverage reduction. Should leverage fall below 4.0x for 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 in the underlying credit quality of LOOP's T&D obligors or unfavorable revisions in T&D support agreements;
--A shift in crude transportation dynamics which permanently reduces throughput volumes;
--Increased leverage beyond 6.0x for a sustained period of time.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (April 2, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Short-Term Ratings Criteria for Non-Financial Corporates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685553
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=798342
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