Paradigm Midstream, LLC Rating Lowered To 'B-' From 'B+' On Revised Commodity Price Assumptions; Outlook is Negative

  • On March 19, 2020, we lowered our commodity price assumptions, which, in our opinion, will negatively affect Paradigm Midstream LLC's (Paradigm) forecast cash flows and weaken the company's credit metrics. We anticipate leverage metrics will remain elevated over the next 12 months.
  • On March 25, 2020, S&P Global Ratings lowered its long-term issuer credit rating on Paradigm to 'B-' from 'B+'. The outlook is negative.
  • We also lowered our issue-level rating on the company's $400 million secured first-lien term loan due 2024 to 'B' from 'BB-'. The '2' recovery rating is unchanged, indicating that lenders can expect substantial (70%-90%; rounded estimate 75%) recovery in a default scenario.
  • We continue to assess the business risk profile as weak, which reflects the relatively smaller scale of operations, limited geographic diversity, and a high number of speculative-grade and not rated counterparties.
  • Our highly leveraged financial risk profile assessment reflects forecast debt-to-EBITDA of 5.0x-5.5x in 2019, 6.5x-7.0x in 2020, and 6.0x-6.5x in 2021.
  • The negative outlook reflects our view that leverage metrics could decline further than our base-case forecast if there is further deterioration in commodity markets, or if throughput on Paradigm's acreage is lower than expected.
TORONTO (S&P Global Ratings) March 25, 2020--S&P Global Ratings today took the rating actions listed above. Due to the recent decline in commodity prices, we have lowered our throughput and earnings expectations for Paradigm's assets from our previous forecast. While we acknowledge the fact that the company generates a considerable portion of its revenues from minimum volume contracts, at least half of its revenues over our forecast period are dependent on producer activity, both on developed and undeveloped reserves. We believe that these volumes are at most risk if commodity prices remain depressed on a sustained basis, as producers reevaluate their development timelines and production plans. We now expect Paradigm's debt-to-EBITDA ratio will be in the 6.5x-7.0x range in 2020, improving to 6.0x-6.5x in 2021. We believe the company will maintain adequate liquidity over our forecast period and benefit from the support of its financial sponsors.
The negative outlook reflects our view that credit metrics could be lower than our base-case forecast if there is further weakening in commodity markets, or if producer activity on Paradigm's acreage is lower than expected. Under our base-case scenario, we forecast debt-to-EBITDA of 6.5x-7.0x in 2020, improving to 6.0x-6.5x in 2021. Furthermore, Paradigm's debt servicing from 2021 will be $40 million-$45 million, and material deterioration in cash flows beyond our forecast could put pressure on the company's coverage ratios and liquidity position.
We could lower the rating if the company's capital structure becomes unsustainable or if there is a deterioration in its liquidity position. This could occur due to lower-than-expected throughput volumes on its systems, higher-than-forecast operating expenses, or increased reliance on debt to finance expansion projects.
We could revise the outlook to stable if we expect debt-to-EBITDA will remain below 6.5x on a sustained basis. This would occur if Paradigm outperforms our forecast due to stronger volumes on its systems and better-than-expected financial performance.
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