Moody’s Investors Service upgraded the corporate family rating of Capital Product Partners L.P. (CPLP) to B1 from B2 and the probability of default rating to B1-PD from B2-PD. The rating outlook is stable.
“Our decision to upgrade CPLP’s rating follows an approximately $116 million debt repayment combined with a successful refinancing of its maturities with the new $460 million credit facility due 2023 thus extending its debt maturity profile,” says Maria Maslovsky, a Moody’s Vice President — Senior Analyst and the lead analyst for CPLP.
Today’s rating action reflects the recent prepayment of approximately $116 million of CPLP’s debt with cash on hand, as well as the refinancing of the material portion of remaining debt to extend its maturity profile. Moody’s also considered CPLP’s maintenance of moderate leverage and strong coverage for some time despite deteriorating market conditions and expectations of continued stable performance with leverage measured as debt/EBITDA below 4.0x despite weakness in the tanker market.
In September 2017, CPLP entered into a new $460 million secured term loan due 2023 priced at L+325. Together with approximately $116 million of balance sheet cash, the new facility refinanced all of CPLP’s outstanding debt except a $16 million ING facility due 2022. The new facility is secured on 35 out of CPLP’s 36 vessels in two tranches; the amortization of the credit facility will further reduce the LTV to enhance future refinancing prospects. As a result of the debt paydown and refinancing, Moody’s expects the company’s leverage measured as debt/EBITDA to decline closer to 3.3x from approximately 4.0x at 30 June 2017.
Tanker segment has been deteriorating in 2017 owing to significant new supply coming in and putting pressure on charter rates, particularly on the crude side. In addition to the excess supply currently pressuring the tanker market, high oil and oil product inventories reduce the demand for tonne-miles. This is a risk because CPLP will need to re-charter its vessels coming up for charter renewal in this weakened market environment.
CPLP’s B1 corporate family rating continues to reflect the group’s (1) small scale and high reliance on Capital Maritime & Trading Corp. (CMTC, unrated), which is its sponsor, as well as one of its main customers and manager of its fleet through its subsidiary Capital Ship Management (CSM, unrated); (2) meaningful exposure to re-pricing risk; and (3) weakened tanker market fundamentals. The B1 rating also takes into account the group’s (4) superior revenue and cash flow visibility, as CPLP mainly operates under medium- to long-term charters; (5) good fleet diversity, comprising crude oil and product tankers, container vessels and one dry bulk vessel; (6) strong asset coverage; and (7) sufficient liquidity.
CPLP’s liquidity is adequate based on expected positive free cash flow, minimal capex and moderate amortization. The company extended its maturity profile with the recent refinancing; however, it has no external liquidity sources, such as revolving credit facilities, and all of its assets are encumbered.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure on CPLPs rating would most likely be driven by an improvement in charter rates combined with higher charter coverage by longer-term contracts. Further deleveraging such that debt/EBITDA ratio consistently moves toward 2.5x and stable asset coverage measured as LTV, as well as good liquidity, would also be needed for an upgrade.
Downward pressure on the rating could develop if charter rates continue to deteriorate leading to reduction in charter coverage and an increase in leverage measured as debt/EBITDA to over 4x. Any weakening in the liquidity profile would also be a concern.
The principal methodology used in these ratings was Global Shipping Industry published in February 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Piraeus, Greece, Capital Product Partners L.P. (CPLP) is an international shipping company engaged in the transportation of crude oil, refined oil products, as well as dry cargo and containerized goods. For the twelve months ended 30 June 2017, CPLP reported $245 million in revenues.