S&P: Tallgrass Energy Partners L. P. Rated 'BB+'; Outlook Stable; Senior Unsecured Notes Also Rated 'BB+'
We assigned our 'BB+' issue-level rating and '3' recovery rating to Tallgrass Energy Partners L. P. and Tallgrass Energy Finance Corp.'s $400 million senior unsecured notes due 2024. The '3' recovery rating indicates that lenders can expect meaningful (50% to 70%; lower half of the range) recovery in the event of a payment default.
Our 'BB+' corporate credit rating on Tallgrass reflects our assessment of a fair business risk profile and significant financial risk profile. The partnership recently acquired a 25% interest in Rockies Express Pipeline (REX) for $440 million. Our ratings reflect the expectation that the partnership will be able to successfully execute on further drop downs over the next few years of the remaining 50% interest in REX from private company, Tallgrass Development, L. P. (TDEV) while maintaining leverage at current levels. We expect REX cash flows and the weighted average length of its contracts to increase in 2017 when the capacity enhancement across zone 3 of the pipeline project becomes operational.
"The outlook on Tallgrass is stable, reflecting our expectation of adequate liquidity, adjusted debt leverage of about 3.5x and a distribution coverage ratio above 1x," said S&P Global Ratings credit analyst Mike Llanos.
We could lower the rating if distributions from REX significantly decline due to additional contract renegotiations or if the partnership experiences operational issues at Pony Express Pipeline, resulting in an adjusted debt to EBITDA sustained above 4x.
Though unlikely in the near-term due to the partnership's limited scale, we could consider higher ratings if the partnership is able to improve its scale and successfully mitigate volumetric risk for the expiring contracts, while maintaining credit metrics at current levels.