Capital Product Partners 'BB-' Rating Placed On Watch Negative On Tanker Business Spin-Off; Withdrawn At Issuer Request

  • On Nov. 28, 2018, vessel owner and operator Capital Product Partners L.P. (CPLP) announced that it will spin off its crude and product tanker business, subject to regulatory approval and financing arrangement.
  • The spin-off will significantly reduce CPLP's fleet to 11 vessels from 36, and concentrate the group's earnings mostly on containership chartering. This outweighs the benefit of the reduction in absolute debt.
  • We are therefore placing on CreditWatch with negative implications our 'BB-' issuer credit rating on CPLP.
  • We are subsequently withdrawing our rating on CPLP at the issuer's request.
LONDON (S&P Global Ratings) Dec. 6, 2018--S&P Global Ratings said today that 
it placed on CreditWatch with negative implications its 'BB-' long-term issuer 
credit rating on Marshall Islands-registered vessel owner and operator Capital 
Product Partners L.P. (CPLP).

We subsequently withdrew the rating at the issuer's request. 

The CreditWatch negative listing reflects our view that CPLP's announced 
spin-off of its crude and product tanker business will result in a weaker 
business risk profile due to the significant reduction in scale and diversity, 
which outweighs the benefit of the reduction in absolute debt.

CPLP's crude oil and oil product shipping business is built around 25 tankers 
and accounts for about 45% of the group's EBITDA. After the spin-off, CPLP's 
fleet will reduce from 36 vessels to 11 (with an average vessel age of 6.5 
years) and be concentrated on 10 containerships and one dry bulker. After the 
spin-off, CPLP will have an average charter duration of 5.3 years. Although 
several containerships benefit from long-term charters that will expire in 
2025, certain vessels are subject to re-employment in 2020. Therefore, the 
group's cash flow stability will depend on future charter rates, which are 
volatile and subject to demand and supply conditions. 

We expect that following the transaction, CPLP's reported EBITDA will 
significantly diminish from about $140 million we forecast in 2018 to $75 
million-$80 million in 2019. This will be followed by about $85 million 
reported EBITDA in 2020 thanks to additional premium from rubber fittings on 
five containerships. Overall, we believe that the smaller EBIDTA base after 
the spin-off will increase the group's susceptibility to adverse industry 
developments. 

We understand that as part of the spin-off, CPLP's reported debt will 
significantly reduce to $290 million or less, from $459 million as of Sept. 
30, 2018. After the spin-off, we forecast that the group would achieve S&P 
Global Ratings-adjusted funds from operations to debt of about 25% in 2019 and 
30% in 2020. This is broadly in line with our previous forecasts.

The spin-off is subject to regulatory approval and financing arrangement, and 
is expected to close early in the first quarter of 2019.