TEXT-Fitch comments on NuStar Logistics L.P
July 6 - Fitch Ratings does not anticipate that lower EBITDA in the second quarter of 2012 will immediately impact the ratings of NuStar Logistics, L.P. (Logistics) and NuStar Pipe Line Operating Partnership, L.P. (NPOP), the operating partnerships of NuStar Energy L.P. (NuStar), which is a publicly traded master limited partnership (MLP). However, the companies' ability to maintain investment grade ratings will require meaningful deleveraging over the coming months. Logistics and NPOP are wholly owned subsidiaries of NuStar. NuStar guarantees the debt of Logistics and NPOP, and the debt instruments for the two operating partnerships have cross defaults and cross guarantees closely linking the ratings. Fitch currently rates Logistics and NPOP as follows: Logistics --Long-term Issuer Default Rating (IDR) 'BBB-'; --Senior unsecured debt 'BBB-'. NPOP --Long-term IDR 'BBB-'; --Senior unsecured debt 'BBB-'. The Ratings Outlook is Negative. NuStar announced today that it expects second quarter 2012 (2Q'12) EBITDA significantly below EBITDA of $160 million from the year prior. The decline in EBITDA is attributed to lower results in the asphalt operations, a hedging loss in the fuels marketing business, and an expected non-cash write-down for the asphalt operations. NuStar also has announced its asphalt operations will be moved into a 50-50 joint venture (JV) with private investment firm Lindsay Goldberg LLC. Proceeds from that transaction, which are expected to total $175 million plus working capital ($400 to $500 million in total proceeds), are expected to be received in the third quarter of 2012 (3Q'12). Additionally, NuStar announced it had received a waiver for the leverage covenant of its $1.5 billion senior unsecured credit facility. The waiver temporarily eases maximum leverage to 6.5x in 2Q'12 and 6.0x in 3Q'12 prior to the closing of the asphalt transaction. Leverage must be below 5.0x at the end of each quarter beginning at year end 2012. Fitch believes that today's announcements will not have an immediate impact on its current ratings or current Negative Outlook on Logistics or NPOP. Fitch had revised the Outlook to Negative in September 2011 to reflect higher leverage and the business risks of managing the company's asphalt operations. The announced lower than expected earnings and covenant waivers reinforce Fitch's belief that Logistics and NPOP metrics will remain under pressure even as it spins out its under-performing asphalt business into a JV. The hedging losses are expected to be a one-time item as according to the company open exposures have now been hedged. The new JV should be modestly beneficial to NuStar's credit profile depending on the final amount of proceeds to the company, which have been pledged towards paying down debt and given the absence of direct working capital requirements related to asphalt operations. Also considered will be NuStar's future obligations to provide support for the JV's operations and finances. NuStar's leverage remains high, and while Fitch believes that NuStar benefits from a diverse mix of businesses with a focus on stable fee-based businesses, deleveraging by the company is going to be a key issue in maintaining its current ratings. The primary catalyst for a downgrade for NuStar Logistics LP and NuStar Pipe Line Operating Partnership LP would be a lack of leverage reduction over the next few quarters, as the asphalt business is sold and two Eagle Ford pipeline projects are completed in the second half of 2012. Further losses from hedges could also lead to future negative ratings actions. The catalyst for a favorable revision in the Outlook would include significantly lower leverage, resulting from reduced debt or meaningful EBITDA growth.
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