Research: Rating Action: Moody’s affirms Delek Logistics’ ratings; stable outlook


New York, June 30, 2022 — Moody’s Investors Service (“Moody’s”) affirmed the ratings of Delek Logistics Partners, LP (“DKL”), including the B1 Corporate Family Rating (CFR), B1-PD Probability of Default Rating and B3 ratings on the existing senior unsecured notes. The Speculative Grade Liquidity Rating was downgraded to SGL-3 from SGL-2. The rating outlook is stable.

“Delek Logistics’ acquisition of 3Bear improves its scale, third party revenue and exposure to midstream gathering and process businesses in the Delaware Basin,” stated James Wilkins, Moody’s Vice President. “The debt funding of the acquisition increased leverage, but the company expects leverage to decline as 3Bear’s earnings grow rapidly.”

Downgrades:

..Issuer: Delek Logistics Partners, LP

…. Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

Affirmations:

..Issuer: Delek Logistics Partners, LP

…. Corporate Family Rating, Affirmed B1

…. Probability of Default Rating, Affirmed B1-PD

….Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD5)

Outlook Actions:

..Issuer: Delek Logistics Partners, LP

….Outlook, Remains Stable

RATINGS RATIONALE

DKL’s B1 CFR reflects rising oil and gas production volumes in the area serviced by its assets, the increase in leverage that resulted from the debt funded acquisition of 3Bear, potential benefits from the acquisition as well as the stable cash flow of DKL’s legacy business. The 3Bear acquisition provides DKL greater scale and third party revenue, additional assets in crude oil gathering as well as entry into the natural gas gathering and processing and salt water processing businesses in the Delaware Basin (Lea and Eddy Counties of New Mexico). DKL expects its revenue to grow rapidly with the development activity in areas where it has customer acreage dedication agreements, more than doubling 3Bear’s EBITDA to ~$100mm in 2023 from 2021 (purchase price multiple of ~6.25x 2023E EBITDA). Moody’s expects elevated commodity prices will incentivize exploration and production companies to continue development in the Delaware Basin, however, there are risks to meeting DKL’s projections as each of the business lines being acquired has significant customer concentration such that a change in development plans by a few customers could materially impact the earnings growth of the acquired 3Bear business. Even so, the acquired business is expected to generate positive free cash flow even with growth capital expenditures required to boost its capacity to meet anticipated demand over the next two years.

DKL’s legacy business benefits from stable cash flow underpinned by long-term, fee-based contracts with minimum volume commitments. DKL is strategically important to Delek US Holdings, Inc. (DK, Ba3 Stable), its majority owner and owner of the general partner, as the MLP provides critical infrastructure, a coordinated growth strategy and a source of external financing. DKL has potential growth opportunities from organic projects as well as acquisitions of assets dropped down from its parent or sourced from third parties. The company’s earnings grew in 2021, despite lower demand for refined products in the difficult macro and industry environment, primarily due to drop downs of assets and was supported by minimum volume commitments.

The rating is constrained by high distributions associated with the MLP model, the modest scale of operations and customer concentration risk with DK as its largest customer and little ability to replace DK’s cash flow should it experience refinery downtime. The refining and marketing industry profit margins are volatile, but Moody’s expects refined products demand to continue to grow and crack spreads to remain robust in 2022.

The SGL-3 Speculative Grade Liquidity Rating reflects Moody’s expectation DKL will maintain adequate liquidity supported by its positive cash flow from operations and unused capacity under its revolving credit facility due 2023. Pro forma for the acquisition and amendment to the revolver terms, the $1.0 billion revolver had ~$890 million in borrowings and available borrowing capacity of ~$110 million, as of March 31, 2022. The revolver has three financial covenants — a maximum Total Leverage Ratio of 5.25x and maximum Senior Leverage Ratio of 3.75x (with 0.25 x step up provisions for up to four quarters for both leverage ratios for certain qualifying growth initiatives) and a minimum Interest Coverage Ratio of 2.0x. Moody’s believes the company will remain in compliance with the financial covenants through 2023. The next maturity of notes is in May 2025.

The stable outlook reflects Moody’s expectation that DKL will generate stable earnings and growth through asset acquisitions and modest organic growth projects will not significantly increase leverage.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The rating could be upgraded if DKL continues to increase its scale and grow EBITDA, while sourcing at least one-quarter of its gross margin from third parties, with leverage (Debt / EBITDA) below 4.0x. Additionally, the credit profile of its sponsor, Delek US Holdings, Inc., would have to support a higher rating for DKL. The ratings could be downgraded if leverage (debt / EBITDA) were to rise above 5.0x on a sustained basis or its sponsor’s credit profile were to deteriorate.

Delek Logistics Partners, LP, headquartered in Brentwood, Tennessee, is a midstream logistics company with crude oil and product transportation pipelines and crude oil gathering systems, terminals and storage facilities. Its general partner is 100% owned by Delek US Holdings, Inc. (NYSE: DK) and management, and the common units are owned by DK and public unitholders (21% LP interest as of March 31, 2022). Its operations largely support the refining operations of its sponsor, DK, which operates four refineries with a combined capacity of 302 mbpd in Texas, Louisiana and Arkansas.

The principal methodology used in these ratings was Midstream Energy published in February 2022 and available at https://ratings.moodys.com/api/rmc-documents/379531. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK . Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

James Wilkins
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD – Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Release Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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