Bermuda-based Teekay Corporation has seen its corporate family rating downgraded from B1 to B2 and senior unsecured debt rating from B2 to B3, due to the company’s decision to reduce the Master Limited Partnership (MLP) subsidiaries’ dividend, according to Moody’s rating agency.
Furthermore, the company’s Speculative Grade Liquidity rating was also lowered to SGL-4 from SGL-3, and the company’s rating outlook was changed to negative from rating under review.
“The downgrades reflect the diminished stand-alone financial flexibility at the parent, given the significantly lower cash flow it expects to receive (from the MLPs) without any change in its financial obligations, particularly in a stress scenario,” Moody’s said.
The company has indicated its intent to preserve cash at the subsidiaries to fund committed projects at the MLP level that extend for some time. While distributions to the parent are not contractually required, they have provided support to the rating, the rating agency informed.
Moody’s anticipates that continued challenges with funding projects through the equity markets and the potential for project delays to increase funding costs, would prompt the MLPs to conserve cash for an extended period. This would limit the MLPs’ ability to materially support debt reduction at the parent and in the consolidated capital structure. Further, it would prolong the prioritization of cash flows to repaying subsidiary debt rather than parent debt.
Teekay has a weak liquidity profile, heightened by its near-term refinancing risks associated with two secured facilities, and reducing revolving credit facilities at the subsidiaries, Moody’s said adding that the prospects of the market values recovering to restore asset coverage of parent debt closer to historical levels could be weak for some time.