Fitch Ratings downgraded Plains All American Pipeline LP credit to one level above junk status and warned that it might go further after the partnership announced dismal second-quarter results from the supply and logistics segment and a potential dividend cut.
The rating agency announced Aug. 10 that it changed Plains' long-term issuer default rating and senior unsecured rating from BBB to BBB-, the lowest investment-grade rating. Fitch also lowered the partnership's short-term issuer default rating and commercial paper rating to F3 from F2. The agency's outlook on Plains remains negative, signaling that a move to junk could follow.
"The downgrades reflect Fitch's expectation that [Plains'] leverage will not improve to 4.5x or below on a sustained basis (at least through 2019)," Fitch said in a statement. "The negative outlook is driven by the potential for continued underperformance of operations, particularly given the more competitive macro environment and the potential for volume weakness to negatively impact profitability and leverage if commodity prices continue to languish."
Fitch added that it is also concerned by "uncertainty" regarding Plains' planned asset sales, which management expects to generate between $400 million and $600 million.
Fitch's move follows an announcement by Moody's on Aug. 9 that it changed its outlook from negative to "under review" for Plains' Baa3 senior unsecured rating and (P)Baa3 senior unsecured shelf rating, as well as the Prime-3 U.S. commercial paper program rating of Plains and subsidiary Plains Midstream Canada ULC (Texas).
During an earnings conference call Aug. 7, Plains Chairman and CEO Greg Armstrong said the partnership could adjust its distribution policy to focus on fee-based cash flows, which in practice would result in a cut to distributions. Analysts at Jefferies LLC and Sanford C. Bernstein & Co. LLC said the distribution cut in Armstrong's "illustrative" example, to $1.80 per unit from $2.20 per unit annualized, would be inadequate.