WaterBridge Operating LLC Downgraded To 'B-' On Forecast For Increased Leverage; Outlook Negative

  • On March 19, 2020, S&P Global Ratings once again revised its crude oil price deck lower, which we expect will cause Texas-based water management solutions company WaterBridge Midstream Operating LLC (Midstream) to have sharply lower adjusted EBITDA and volume flow levels than our previous expectations. Therefore, we forecast consolidated adjusted leverage metrics to remain above 6x over the next 12 months.
  • As a result, we are lowering our issuer credit ratings on Midstream and its parent company, WaterBridge Operating LLC (WaterBridge), to 'B-' from 'B'. Our recovery rating on its senior secured term loan B remains '3', indicating our expectation for meaningful (50%-70%; rounded estimate: 60%) recovery in the event of a payment default. The '1' recovery rating on the $150 million super-priority revolving credit facility (RCF) is unchanged, resulting in a 'B+' rating. The outlook is negative.
  • The negative outlook reflects our view of limited cushion to the financial covenants on sharply lower volumes and EBITDA in 2020 under the weak crude oil price environment. This also results in consolidated adjusted leverage above 6x.
NEW YORK (S&P Global Ratings) March 26, 2020-- S&P Global Ratings today took the rating actions listed above.
The rating action reflects the downward revision of our commodity price deck, which we expect will result in a material decline in forecast volumes and EBITDA from our previous forecast. Under our $25/barrel (bbl) West Texas Intermediate (WTI) crude price assumption for the remainder of 2020, many producers will likely scale back their drilling activity and growth initiatives in the immediate term. This results in our assumption of adjusted EBITDA in the $170 million area for 2020. In addition, we believe the company will not realize the same volumetric assumptions it previously assumed for the numerous acquisitions completed over the last 12 months. These acquisitions, which have been partially financed with debt, could result in the company having limited cushion to its net leverage financial covenant under the RCF. We now forecast WaterBridge to achieve consolidated adjusted leverage of approximately 7x compared to our prior forecast of 4.25x-4.5x. That said, our calculation of consolidated adjusted leverage incorporates the preferred securities issued at its parent companies, which we treat as 100% debt. Despite the net leverage covenant constraints under its RCF, we believe WaterBridge has adequate liquidity over the next two years even if it cannot draw on this facility as its sponsors have shown their support in the past and we anticipate the company to reduce costs and capital spending.
The negative outlook reflects our expectation that volumes and EBITDA will be sharply lower in 2020 due to the weak crude oil price environment, resulting in consolidated adjusted leverage metrics above 6x. We expect this to pressure its net leverage covenant.
We could lower our rating on WaterBridge if the company's capital structure becomes unsustainable or if its liquidity position deteriorates without additional support from its sponsors. This could also occur if we expect the company to violate its financial covenants.
We could revise the outlook on WaterBridge to stable if it maintains an adjusted debt-to-EBITDA ratio of less than 6.5x and we continue to view its liquidity position as adequate.
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