SemGroup Corp. Outlook Revised To Negative From Stable On Announced Joint Venture Transaction; Ratings Affirmed

  • Tulsa, Okla.-based midstream energy company SemGroup Corp. has announced the formation of a joint venture (JV) with Kohlberg Kravis Roberts & Co. (KKR) called SemCAMS Midstream ULC.
  • Even though SemGroup is using cash proceeds of about US$460 million to pay down the balance on its revolving credit facility, this is offset by the addition of asset-level debt at SemCAMS Midstream, which we fully consolidate into SemGroup and our treatment of the KKR perpetual preferred equity as 100% debt, resulting in elevated leverage over our forecast period.
  • We revised our outlook on SemGroup to negative from stable following the transaction announcement.
  • We affirmed our 'B+' long-term issuer credit and senior unsecured issue-level ratings and 'BB' senior secured issue-level ratings on SemGroup.
  • The recovery ratings on the company's senior secured and senior unsecured debt are unchanged at '1' and '4', respectively. The '1' recovery rating reflects our expectation for very high (90%-100%; rounded estimate: 95%) recovery in our simulated default scenario. The '4' recovery rating reflects our expectation for average (30%-50%; rounded estimate: 35%) recovery in our simulated default scenario.
  • The negative outlook reflects elevated leverage over our 12-month outlook period, with our forecast base-case scenario debt-to-EBITDA ratio of 6.0x-6.5x.
TORONTO (S&P Global Ratings) Jan. 11, 2019--S&P Global Ratings today took the 
rating actions listed above. The outlook revision reflects elevated leverage 
from the announced transaction, with S&P Global Ratings' forecast leverage 
increasing to 6.0x-6.5x in 2019 from 5.5x-6.0x before the transaction. This 
follows the announced transaction where SemGroup will contribute the shares 
and assets of its Canadian subsidiary, SemCAMS, valued at C$1.15 billion 
(US$860 million), in exchange for C$615 million (US$460 million) cash proceeds 
and 51% common equity ownership in SemCAMS Midstream. KKR will contribute 
C$515 million (US$385 million) of cash in exchange for 49% of the common 
equity ownership. KKR will also contribute C$300 million (US$224 million) to 
acquire perpetual preferred equity in SemCAMS Midstream. In addition, the JV 
will enter into an C$800 million (US$598 million) underwritten bank credit 
facility. SemCAMS Midstream also entered into a definitive agreement to 
acquire Meritage Midstream ULC and its midstream infrastructure assets for 
C$600 million (US$449 million). Even though SemGroup will receive about US$460 
million in cash and will use the proceeds to pay down borrowings under its 
revolving credit facility, this is offset by the debt at the JV, which we 
fully consolidate in our credit metrics, resulting in the elevated leverage we 
are forecasting over our 12-month outlook period.

The negative outlook reflects elevated leverage over our 12-month outlook 
period with our forecast base-case scenario debt-to-EBITDA ratio of 6.0x-6.5x. 
We continue to expect the company will have stable cash flow underpinned by 
take-or-pay and fee-based contracts, and operational performance in line with 
our expectations. 

We could lower the ratings if we forecast SemGroup's consolidated leverage to 
stay above 6x in 2020. This could occur due to weaker-than-expected volumes in 
the underlying business segments or if speculative-grade counterparties cannot 
meet their contractual agreements. It could also result from predominantly 
debt-funded acquisitions, growth capital spending, or cost overruns or delays 
on projects under construction.

We would consider revising the outlook to stable during our 12-month outlook 
period if SemGroup's operational and financial performance is as expected and 
we forecast the company's leverage to be below 6.0x in 2020. This could also 
occur from incremental cash flows as new projects come into service and 
proceeds from asset monetization are used to pay down debt.