Fitch Affirms Martin Midstream Partners' Ratings

Published: 2025-01-20 05:46:08 ET MMLP

Fitch Ratings has affirmed Martin Midstream Partners, LP's (Martin) and Martin Midstream Finance Corp.'s (FinCo) Long-Term Issuer Default Rating (IDR) at 'B-', and Second Lien Secured Notes at 'B+'/'RR2', which are co-issued by FinCo.

The Rating Outlook is Stable.

Martin's ratings underscore its largely fee-based cash flow profile, longstanding customer relationships, and leverage that is considered strong for the rating category. The ratings are tempered by the limited headroom for substantial EBITDA downswings, but Martin's business line diversity somewhat eases this concern. Martin's Project ELSA could enhance future cash flows, but is progressing at a slower pace than previously anticipated.

Martin's cash flow profile also faces significant volumetric and commodity price risks, and the tight interest coverage covenant on Martin's revolver, which is its primary source of liquidity, could also pose future liquidity constraints.

The Stable Outlook reflects expectations of steady U.S. Gulf Coast refinery utilization rates, minimal cash flow swings due to business line diversity, and limited liquidity pressures in the absence of near-term debt maturities.

Key Rating Drivers

Modest Size and Scope Partially Offset by Diversity: Martin's modest EBITDA size and concentrated operations in the U.S. Gulf coast's oil and gas region limits its ability to sustain meaningful industry downturns, raising potential liquidity concerns. The Gulf coast, however, is home to leading petrochemical facilities, and strong refinery utilization rates, which drive most of Martin's business, and somewhat offset the regional concentration risks.

Martin's business line diversity is credit positive, given its exposure to multiple commodities and some non-oil and gas customers. This lowers the likelihood of simultaneous impacts across Martin's businesses, leading to cash flow stability, while partially offsetting size limitations.

Volumetric & Commodity Price Exposure Dampen Cashflow Profile: Martin's cashflow is exposed to both volumetric and commodity price risks, which heightens cash flow volatility. Although 70%-75% of Martin's EBITDA is expected from fee-based contracts, only 10%-15% of the EBITDA contains minimum volume commitment (MVC) contracts, leaving most of the cash flows exposed to volumetric risks. Additionally, 25%-30% of EBITDA comes from margin-based businesses that are subject to commodity price relationships and are prone to thin profitability.

Financial Flexibility Pressured by Market Fundamentals: Fitch's forecast takes into consideration the current U.S. interest rate environment and oil and gas price forecasts. While expectations for leverage at or around 4.0x is considered strong for the rating category, Martin's high debt interest burden is expected to strain interest coverage, keeping it in the 2.2x-2.4x range, limiting financial flexibility. Current inflation expectations, coupled with anticipated commodity price backwardation, may also strain Martin's EBITDA growth.

The foregoing dynamics are likely to keep interest coverage close to the covenants on the revolver. Therefore, not all of the revolver commitment might be available at times. Nonetheless, Martin's liquidity position is manageable in the absence of near-term debt maturities.

Growth Initiatives Gradually Gain Momentum: Martin's Project ELSA, a joint venture (JV) to provide Samsung C&T America, Inc.'s semiconductor fabrication facility in Texas with electronic level sulfuric acid (ELSA) is progressing slower than expected due to Samsung's delays in bringing the plant online. However, the JV has started taking feedstock from Martin in 3Q24 for testing and qualification as expected. Martin is the exclusive feedstock provider and receives a guaranteed reservation fee. The project is expected to start adding a modest amount of EBITDA in 2025, with meaningful growth anticipated in 2026.

Relationship with Parent and Top Customers: Martin Resource Management Corporation (MRMC), which owns Martin's General Partner, is Martin's parent company and largest customer, accounting for nearly 15% of EBITDA. Fitch evaluates MRMC's credit profile to be about the same as Martin's. Therefore, as per Fitch's Parent Subsidiary Linkage criteria, Martin's ratings do not consider linkage factors with MRMC. Martin and MRMC recently mutually terminated their announced merger, and Fitch does not anticipate this transaction to occur in the near term. MRMC is expected to be supportive of Martin's credit profile.

Martin also benefits from longstanding relationships with other top customers, spanning multiple decades, reducing risks associated with exposure to short-term contracts. These customers are expected to drive over 60% of EBITDA, and many are investment-grade rated. However, most customers are high-yield or unrated private companies deemed to be high yield.

Derivation Summary

Martin stands out in Fitch's midstream coverage due to its diverse operations along the midstream value chain.

Summit Midstream Partners, LP (B-/Positive), a gathering and processing focused, modestly sized yet relatively larger peer, offers regional diversification and balanced exposure to both oil and gas, but has higher exposure to mature declining basins.

Martin is geographically concentrated, but it thrives in a prolific region. Martin, benefits from greater business line diversity than Summit Midstream Partners, but is mostly dependent on regional refinery utilization rates. Both have limited support from revenue assurance type contracts, yet Martin faces more cash flow volatility due to higher commodity price exposure. Martin's lower leverage at about 4.0x, partially offsets its smaller size and more volatile cash flow, leading to the same IDRs, while Summit's expected leverage improvement is reflected in its rating outlook.

M6 ETX Holdings II MidCo LLC (M6; B/Stable) is a mid-sized, regionally concentrated midstream peer. It benefits from having a smaller portion of cash flows exposed to commodity prices and a larger share supported by revenue assurance type take-or-pay contracts. M6's leverage is expected to be more than one full turn higher than Martin's in the near term. Martin's lower leverage expectations compared with that of M6 partially offsets its weaker cash flow profile, leading to a one-notch difference in their IDRs.

Key Assumptions

Fitch's oil and gas price deck;

Base interest rate for the credit facility reflects Fitch's Global Economic Outlook;

Oil and gas activity levels in the U.S. Gulf Coast consistent with Fitch's base case for oil and gas prices;

Successful execution of growth projects and growth capital spend consistent with management guidance;

Common dividends remain consistent with the current levels for most part of the forecast years;

No further M&A, asset divestitures, business exits, or large growth projects over the forecast period.

Recovery Analysis

For the Recovery Rating, Fitch estimates the company's going concern value was greater than the liquidation value. The going concern multiple used was a 6.0x EBITDA multiple, which is in the range of most multiples seen in recent reorganizations in the energy sector. There have been a limited number of bankruptcies within the midstream sector.

Two recent gathering and processing bankruptcies of companies indicate an EBITDA multiple between 5.0x and 7.0x, by Fitch's best estimates. In Fitch's recent bankruptcy case study, Energy, Power and Commodities Bankruptcies Enterprise Value and Creditor Recoveries, published in September 2024, the median enterprise valuation exit multiple for the 51 energy cases with sufficient data to estimate was 5.3x, with a wide range of multiples observed.

Fitch assumed a going concern EBITDA of approximately $85 million, which reflects Fitch's view of a sustainable, post-reorganization EBITDA level, upon which it has based the company's valuation. As per criteria, the going concern EBITDA reflects some residual portion of the distress that caused the default.

Fitch calculated administrative claims to be 10%, and a fully drawn credit facility, which are standard assumptions. The outcome is a 'B+'/'RR2' rating for the senior second lien secured notes, which corresponds to an expected recovery in the range of 71%-90%.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDA interest coverage below 2.0x on a sustained basis;

EBITDA leverage above 5.0x on a sustained basis;

Weakening of the liquidity profile.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

EBITDA interest coverage above 3.0x on a sustained basis;

EBITDA leverage below 3.5x on a sustained basis;

Material change to cash flow stability profile or a greater proportion of EBITDA derived from long-term MVC-type contracts.

Liquidity and Debt Structure

Martin had sufficient liquidity as of Sept. 30, 2024. The partnership had roughly $54.4 million of available liquidity consisting of $56,000 of cash on the balance sheet, and around $54.4 million available under its first lien secured revolving credit facility (net of $9.2 million in letters of credit). Martin's first-lien secured credit facility agreement has a $150 million commitment expiring on Feb. 8, 2027. The revolver includes a $50 million accordion subject to certain conditions. Martin's nearest maturity is the revolver, followed by the $400 million 11.5% second lien secured notes due February 2028.

The covenants on the credit facility requires Martin to maintain a minimum interest coverage ratio of 2.0x, a maximum first lien leverage ratio of 1.5x, and a maximum total leverage ratio of 4.75x until March 31, 2025, stepping down to 4.5x thereafter. As of Sept. 30, 2024, Martin was compliant with all debt covenants, and had an interest coverage ratio of 2.23x, first lien leverage ratio of 0.74x, and total leverage ratio of 4.14x.

Fitch expects Martin to remain compliant with all the covenants in the near term. However, Martin occasionally may not be able to access the full revolver capacity due to the covenants.

Issuer Profile

Martin is a publicly traded (NASDAQ: MMLP) master limited partnership that owns and operates midstream assets primarily in the U.S. Gulf Coast.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

Martin Midstream Partners L.P. has an ESG Relevance Score of '4' for Group Structure. Martin operates under a complex group structure with exposure to financial issues arising elsewhere in the group, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Martin Midstream Partners L.P. has an ESG Relevance Score of '4' for Governance Structure due to ownership and management concentration by its parent MRMC, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.