-- We are assigning our 'BBB+' long-term corporate credit rating to
Brookfield Infrastructure Partners L.P.
-- The rating reflects our view of the partnership's strong business risk
-- The stable outlook reflects our view that the portfolio of companies
provides a strong stream of cash flow to BIP.
On May 4, 2012, Standard & Poor's Ratings Services assigned its 'BBB+'
long-term corporate credit rating to Bermuda-based Brookfield Infrastructure
Partners L.P. (BIP). The outlook is stable.
The rating on BIP reflects Standard & Poor's view of the partnership's strong
business risk profile. BIP's portfolio consists of a diverse group of
businesses with very stable cash flows. The companies' diversity is manifest
on several levels. The first is geographic, with companies in North and South
America, Australia, and Europe. Moreover, these cash flows are subject to a
variety of revenue frameworks with a majority of the cash flow supported by
regulations or a strong contractual framework that provide monopolistic or
near-monopolistic competitive positions. Secondly, the counterparties with
respect to many of these contracts are companies or governments that we
consider investment-grade. Finally, the services from companies that make up a
large percentage of EBITDA enjoy high barriers to entry, either as a result of
a regulatory or contractual framework or because of economies of scale.
Moreover, a significant portion of EBITDA represents an essential service for
the operating company's customers, but do not constitute a significant
expense, further strengthening the stability of cash flow. Two examples of
this are the Dalrymple Bay Coal Terminal and Brookfield Rail.
We also base the rating on what we view as BIP's significant financial risk
profile. Although we believe financial measures at the consolidated level are
weak, the significant asset level cash flow provides strong financial
flexibility. This is particularly true in light of the limited amount of debt
at the BIP level, which management estimates will remain at 5%-10% of the
partnership's proportionate share of consolidated debt. The financial measures
reflect BIP's practice of using nonrecourse debt in its operating companies.
Although this debt is nonrecourse to the partnership, it increases the
variability of cash flow distributable to BIP because this cash flow is only
available after the operating needs and debt servicing requirements at the
operating company level are satisfied. Moreover, most of the BIP-level debt is
subject to covenants, which prevent the distribution of cash if certain
thresholds are breached. Although there is sufficient cushion between the
current covenant level and the threshold level, deterioration in economic
conditions in one of the partnership's key markets could lead to a covenant
breach, which in turn would reduce the cash flow available to BIP. An example
of this is a slowdown in the global steel market particularly in Asia. This
would affect the partnership directly in that Dalrymple Bay Coal Terminal is
responsible for processing 22% of world metallurgical seaborne coal annually.
Furthermore, the majority of the expected growth at Brookfield Rail will be
from iron ore shipments bound for Chinese steel mills. The presence of
cash-flow lock-up covenants and the potential volatility in cash flow is a
risk that constrains the rating. In addition, most of the company-level debt
is subject to bullet maturities, which increase the potential volatility of
remittable cash flow to BIP. Should a portfolio company be unable to
refinance a maturity, creditors would likely exercise their security, which
would likely lead to a suspension in cash flow distribution to BIP.
BIP is a Bermuda-based partnership focusing on infrastructure assets.
Brookfield Asset Management Inc. (A-/Negative/A-2) owns approximately 30% of
the partnership's units, with the remainder held by the public. The businesses
that underlie BIP can be grouped into three broad operating platforms:
utilities, transport and energy, and timber.
The partnership's operating strategy is to own and operate a globally
diversified portfolio of infrastructure assets with revenues that are
primarily regulated or contracted on a long-term basis and benefit from GDP
growth or inflation. BIP is committed to actively managing the assets to
increase efficiency and optimize profitability. In that regard, while the
partnership does not own 100% of all of the assets, it does control the
majority of them, which is a key consideration in its strategy.
The utilities platform represents approximately 52% of EBITDA, while the
transport and energy platform represents about 40%. We expect that by 2014
these figures will reverse, with the utilities platform representing
approximately 42% and the transport and energy platform representing
approximately 50%. The shift is largely due to a significant expansion at
Brookfield Rail. The company is pursuing a number of customer-driven
initiatives to upgrade the rail system to service iron ore mining companies in
southwest Australia. Supporting this expansion are take-or-pay contracts with
investment grade quality counterparties or that have other credit enhancements.
On a partially deconsolidated basis, we expect the base case level of
remittable cash to be approximately US$350 million in 2012, increasing to
approximately US$500 million in 2014. Under a stressed scenario, for example a
weaker than expected Australian dollar or delays in cash flow generation at
Brookfield Rail, we expect the level of remittable cash could fall to US$350
million-US$375 million in 2014.
An important aspect of our analysis is the level of remittable cash flow
available to BIP to service its corporate-level obligations. Notwithstanding
the forecast amount of cash available to the partnership, and the relatively
small amount of debt forecast at the BIP level, we recognize the potential
volatility of this cash flow because of the lock-up covenants that exist at
the asset level. Should a stressed economic condition consistent with a 'BBB'
category manifest itself, the asset companies' ability to remit cash could be
curtailed, reducing the partnership's ability to service its obligations. This
exposure to cash-flow lock-up covenants and the potential volatility in cash
flow to BIP that they create is and will continue to be a rating constraint.
Management has indicated that it has a strong commitment to keeping financing
a significant portion of growth through equity issuance and asset level
financing. In that regard, management has indicated that it is committed to
maintaining the amount of debt at BIP to 5% of its proportionate share of
consolidated debt. Moreover, a movement toward 10% would be in the context of
further growth while maintaining a similar business risk profile, including
cash flow and equity issuance.
We expect that in the next 12 months, projected sources of liquidity,
including a US$700 million availability under its committed revolving credit
facilities (maturing September 2013), and its annual cash flow generation that
we project to be about US$450 million will cover projected uses of
approximately US$300 million more than 3x. BIP does not have any debt maturing
in 2012 .This does not include the proportionate availability under subsidiary
credit facilities of approximately US$640 million.
Notwithstanding the more than adequate liquidity outlined above, our belief
that BIP has a high standing in the capital markets and that it demonstrates
generally very prudent financial risk management, we consider the partnership
to have adequate liquidity as per our criteria. BIP might use the committed
revolving facility at least temporarily for things such as bridge financing
for acquisitions or refinancing. Given that the maturities at the asset
company level are predominately bullet, the partnership could draw on its
facilities to avoid potential temporary disruptions in the markets or a
default should the asset company not be able to refinance maturing debt.
Moreover, given the committed revolver's September 2013 maturity and the
12-month window in our liquidity criteria for us to consider these facilities
a source of liquidity, such facility will not be considered a source after
Sept. 30, 2012, unless it is renegotiated before then.
The stable outlook reflects our view that the portfolio of companies provides
a strong stream of cash flow to BIP based on geographic diversity, revenue
framework diversity and competitive position. We base this view on the
partnership's continued ability to attract external capital and adherence to
its policy of using mainly nonrecourse company-level debt. However, the
presence of lock-up covenants and a high level of leverage at the asset level
introduce potential volatility to the remittable cash flow. Because of this,
an upgrade is unlikely during our two-year outlook horizon. Standard & Poor's
could consider lowering the rating if the level of debt at the partnership
represents more than 10% of its proportionate share of consolidated debt. We
could also consider lowering the rating if remittable cash flow deteriorates
or the volatility of remittable cash flow to BIP from the asset level
companies increases on a sustained basis.
Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- Rating Methodology for Investment Holding and Operating Holding
Companies, Feb. 5, 2003
Brookfield Infrastructure Partners L.P.
Corporate credit rating BBB+/Stable/--