Fitch Affirms ITT Holdings LLC at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' Long-Term Issuer Default Rating (IDR) and senior unsecured debt rating for ITT Holdings LLC (ITT). The Rating Outlook is Stable.
ITT is a wholly-owned subsidiary of Macquarie Infrastructure Corporation (NYSE: MIC), a publicly traded investment holding company. In 2015, ITT accounted for approximately 48% of MIC's EBITDA.
KEY RATING DRIVERS
The 'BBB-' rating is supported by the company's competitive advantage of having strategically located bulk liquid terminal facilities with significant market share in its two primary locations, the New York Harbor and on the lower Mississippi River. Additionally, ITT has had very high and consistent utilization rates that have averaged 94% over the last several years regardless of crude, gasoline and other commodity prices. While the contract life for storage tends to be short compared with other midstream assets such as pipelines, ITT's average contract term is approximately two and a half years.
Leverage has remained low and was 3.8x for the LTM ending March 31, 2016. Dividend payments to its ultimate parent, Macquarie Infrastructure Corporation (MIC), are flexible and MIC intends to ensure that dividends it receives will enable ITT to maintain low leverage. In the past, MIC has demonstrated its willingness to support an entity in its portfolio by injecting equity. While Fitch does not anticipate that ITT will need financial support from MIC, it views MIC's past willingness to support a subsidiary as favorable.
Concerns for ITT include a lack of diversified assets, its concentration of assets in two locations, risk of contract rates declining when they come up for renewal and ownership by a financial institution designed to distribute dividends to common shareholders.
Leverage: As of March 31, 2016, ITT's leverage was 3.8x, unchanged from yearend 2015 and up from 3.3x at the end of 2014. The increase in leverage from yearend 2014 is due to higher debt that outpaced the rise in EBITDA. At year-end 2015, ITT's debt rose $177 million from the prior year. Fitch attributes the increase to higher net cash flows to MIC. Fitch forecasts leverage to be in the range of 3.7x-4.0x over through 2018.
Stable Cash Flows: Over the last several years, ITT's storage assets have operated at utilization rates which averaged 94% regardless of commodity prices. This has allowed the company to generate stable cash flows. The company's environmental services business can be volatile and is largely dependent on the need to provide services for oil spills. Overall this is a small component of ITT's cash flows and is not capital intensive.
Fitch's key assumptions within the rating case for MPLX include:
--Revenue growth in the forecast years is in the low to mid-single digits;
--EBITDA margins average approximately 53%, in line with historical margins;
--Cash flows to MIC (in the form of corporate allocation expenses and distributions) are manageable and do not result in higher leverage;
--Leverage is in the range of 3.7x-4.0x in the forecast years.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Favorable rating action appears unlikely in the near term given lack of diverse of assets and size;
--If size and scope of operations were increased (including EBITDA of $500 million or greater) and more diversified, positive rating action could occur if leverage was between 3.5-3.8x over a sustained period of time.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--EBITDA deterioration which could result from an unfavorable recontracting rate environment;
--Increases in capital spending or acquisitions which adversely impact the balance sheet and increase leverage;
--Actual or anticipated leverage in the range of 4.0-4.5x for a sustained period of time without increased diversity;
--Unforeseen changes in the cash flows up to the parent, MIC, which results in credit deterioration.
Fitch views ITT's liquidity as sufficient. The company has $577 million of unused capacity on its revolver as of the end of 1Q16. Cash on the balance sheet was $9 million. Furthermore, ITT can receive financial support from MIC by providing flexibility in the size of the dividend or in the form of cash contributions. Fitch does not expect ITT to rely on MIC for financial support.
The bank agreement restricts leverage from exceeding 5.0x. If acquisitions are greater than $50 million within 12 months, the maximum leverage ratio is increased to 5.5x for two consecutive quarters. The bank defined leverage ratio allows for material project EBITDA adjustments and acquisition EBITDA adjustments. Interest coverage must exceed 3.0x. This covenant can fall away if ITT receives certain ratings upgrades from the rating agencies. Restricted payments can be made if there is no default or event of default. It is required that after the pro forma effect for restricted payments, the loan parties must be in compliance with the leverage ratio requirements. Fees under the management services agreement (for fees paid to MIC) are included in the definition of restricted payments covenant.
Fitch has affirmed the following ratings:
ITT Holdings LLC
--Long-Term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
The Rating Outlook is Stable.