S&PGlobal Ratings downgraded PlainsAll American Pipeline LP, as $600 million in assumed debt from thepartnership's simplificationplan is expected to affect its balance sheet.
Therating agency lowered its corporate credit rating on Plains to BBB- from BBB,as well as its short-term rating to A-3 from A-2, according to a Sept. 26 newsrelease. S&P's outlook on the long-term rating is stable.
InJuly, Plains unveiled a $7.2 billion transaction with general partnerPlains GP Holdings LPto reduce cost of capital through the simplification of its ownership andgovernance structure. The assumption of affiliated debt would offset thefinancial benefits of the deal for the master limited partnership, whichinclude the elimination of the general partner's incentive distribution rightsand economic rights and a 21% distribution cut, S&P Global Ratings said.
Thus,after the simplification deal closes, Plains' financial leverage would behigher than S&P Global Ratings' target leverage ratios that merit a mid-BBBrating. Still, the transaction is anticipated to help Plains manage futuregrowth and improve its balance sheet given challenging industry conditions, therating agency said.
"Sincethe announcement, the partnership's cost of equity has improved and Plains hasinitiated equity issuance under its continuous equity offering program that,along with Plains' growth initiatives and the distribution cut, should helpreduce balance sheet leverage and achieve a distribution coverage ratio above1x in 2017," S&P Global Ratings said.
Plains'issue-level rating on its senior unsecured debt was also cut to BBB- from BBB,and the short-term rating on its commercial paper was downgraded to A-3 fromA-2.
S&P Global Ratingsand S&P Global Market Intelligence are owned by S&P Global Inc.