Moody’s Investors Service has announced that it:
today downgraded the senior unsecured ratings of TransCanada PipeLines Limited (TCPL) to Baa1 from A3.
…
“TransCanada’s financial profile has been weak for several years,” said Gavin MacFarlane VicePresident/Senior Credit Officer. “The downgrade reflects our expectation that debt to EBITDA will improve from 5.6x at the end of 2018, but remain around 5x in 2019 and 2020.”Contributing to the weak financial metrics, the company has experienced challenges executing its large capital program leading to delays in EBITDA growth and some cost-overruns. Moody’s recognizes that the company has levers it may utilize to drive a significant improvement in leverage metrics, for example material asset sales, however these have not materialized and are subject to some execution risks. In addition, Moody’s forecasts a decline in the company’s distribution coverage metric, which reduces financial flexibility over the next few years.
TCPL’s Baa1 rating is driven by its predictable and growing cash flow, owing to the regulated and contracted nature of its businesses, and its large size and portfolio diversification benefits. Cash flow is typically underpinned by either cost of service regulation or long term contracts. Offsetting these strengths are weak financial metrics and a large but executable capital program. Moody’s sees financial metrics improving as the company executes a CAD36 billion of capital program over the period 2019-2023 that we expect to be primarily funded with cash flow from operations, assets sales, equity, hybrids and some incremental debt. TCPL’s rating incorporates our expectation that EBITDA will continue to grow towards CAD10 billion from CAD8.9 billion in 2018 and debt will remain close to CAD50 billion. The rating incorporates our expectation that debt to EBITDA will improve from 5.6 to about 5x in 2019.
Our forecasts exclude about CAD20 billion of projects that have not yet been fully committed, for example Keystone XL, and have risks that either make construction uncertain or have a long term spending profile. Large projects like Keystone XL could place pressure on financial metrics during construction.
TransCanada is the ultimate parent holding company of TCPL. TransCanada’s Baa2 issuer rating reflects a 1-notch adjustment below the rating of TCPL as a result of its structural subordination to TCPL. The rated obligations of TransCanada Trust and TransCanada American Investments Ltd reflect a guarantee provided by TCPL. The TransCanada Trust Baa3 rating is two notches lower than TCPL’s Baa1 senior unsecured rating and is consistent with a 2-notch differential Moody’s applies to preferred shares with investment grade companies. The TransCanada Trust notes are guaranteed by TCPL on a subordinated basis however the TransCanada Trust notes have an automatic exchange provision that converts the notes into preferred shares of TCPL in the event of financial distress. The Prime-2 short-term commercial paper rating on TransCanada American Investments Ltd and TCPL USA reflects the guarantee provided by TCPL. NGTL’s Baa1 rating is strongly correlated with that of TCPL based on its strategic importance and TCPL’s position as a key creditor.
Moody’s views the midstream sector, including TCPL, as having moderate risk exposure to carbon transition risks. TCPL’s exposure is indirect as change in commodity prices affect its shippers, which may then have an impact on volumes through its systems and counterparty risks. A key issue for the sector is that regulations can drive competitive changes among basins. TCPL is somewhat insulated from this issue as a result of its diversification.
Affected issues are TRP.PR.A, TRP.PR.B, TRP.PR.C, TRP.PR.D, TRP.PR.E, TRP.PR.F, TRP.PR.G, TRP.PR.H, TRP.PR.I, TRP.PR.J and TRP.PR.K, but note that Moody’s does not actually rate the preferreds.
The story was picked up by the Globe & Mail.
I’ve a question for James and the wider audience in general.
Enbridge used to be P2 then fell to P2(L) and is now P3H
Husky used to be P2(L) and is now P3H.
And now we have TransCanada. Not sure if DBRS or S&P will downgrade the preferreds.
Which means, it’s possible that pretty soon none of the Piplelines/Energy will have P2(L) or higher ratings.
Same thing happened with Telecom sector as well when BCE/Bell’s rating fell to P3(H)/P3.
About a decade ago Manulife was P1(L) and is now two notches below that. Banks have already given us NVCC stuff that is not the same as used to be a decade ago with P2(H) ratings.
Which means, the only options left will be Insurance, Banks(despite the NVCC) and a handful of split shares (Or am I missing a few?)
Does it mean perferreds as a fraction of overall portfolio should fall to account for a lack of available issues?
What happens if we get another handful of issues downgraded?
skeptical , what this shows is investing is hard work and no investment can be bought and forgotten about .as the down grades happen you have to go over your risk tolerance and decide to sell or not . downgrades and the decreasing number of highly rated issues strengthens the case for professional management such as the fund run by james