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Moody's weighs downgrading Plains All American debt to junk

Moody's may downgrade Plains All American Pipeline LP credit into junk status, after the partnership's supply and logistics segment reported a steep decline and management proposed a potential dividend cut that drove an Aug. 8 stock selloff.

The rating agency announced 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. Moody's cited Plains' poor EBITDA track record and an Aug. 7 second-quarter earnings report that revised full-year guidance to $2.08 billion, an 8% drop from the original prediction.

"While the company is preparing to take additional steps to improve its leverage and distribution coverage, without confidence in its basic operating performance, the investment grade rating cannot be supported unless those steps are material, which Moody's does not expect," Moody's Senior Vice President Terry Marshall said in a statement. Baa3 is Moody's lowest investment-grade rating.

Credit Suisse's Bhavesh Lodaya told S&P Global Market Intelligence on Aug. 9 that the knock-on effects of a long-term supply and logistics segment decline could cause Plains to lose its investment-grade status.

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.

Moody's said it plans to conclude the review in the next few weeks.