Fitch Ratings has upgraded PBF Logistics LP's (PBFX) Long-Term Issuer Default Rating (IDR) to 'BB-' from 'B+' and senior unsecured notes to 'BB-'/ 'RR4' from 'B+'/'RR4'.
In addition, Fitch has affirmed PBFX's senior secured revolver at 'BB+'/'RR1'. The Rating Outlook is Stable. The notes are co-issued by PBF Logistics Finance Corporation.
The upgrade and Stable Outlook reflect similar rating actions at PBF Holding Company LLC, PBFX's affiliate and primary counterparty. PBF Holding's Long-Term IDR was upgraded to 'BB-'/ Stable, reflecting material debt reduction and a simplified capital structure. The Stable Outlook reflects Fitch's expectation that refining conditions will remain positive in the near term, the company's continued debt reduction efforts and positive FCF.
PBFX's ratings reflect its strong credit linkage with PBF Holding. The ratings also reflect the partnership's modest size, low leverage and stable cash-flows supported by fee-based and fixed-priced contracts that limit commodity price exposure and provide volume protection through minimum volume commitments.
Key Rating Drivers
Counterparty Concentration Risk: PBFX derives approximately 85% of its revenues from its affiliate, PBF Holding. PBF Holding is expected to remain the partnership's largest customer over Fitch's rating horizon. PBFX provides PBF Holding with critical logistics assets that support its refining operations on a long-term, fixed fee basis with significant minimum volume commitments. As its primary counterparty, PBFX is subject to PBF Holding's operational, business and financial risks, whereby throughput volumes at PBFX's facilities could be significantly reduced, which could adversely impact cash flows and distributions. The equalization of IDR's reflects this.
In the absence of expansion of the asset portfolio to service more third-party customers, volume growth remains dependent on PBF Holding, and could limit the partnership's future growth.
High Maturity Wall: With its deleveraging strategy, PBFX has continued to enhance financial flexibility, but faces addressing its near-term debt maturities. The partnership has a substantial maturity wall, with $500 million revolving credit facility maturing end of July 2023 and $525 million notes due in May 2023. Fitch expects the partnership to likely extend the revolver before it becomes current in July 2022, supported by the security package. Management continues to evaluate the capital structure that best fits the partnership in terms of amount and tenor for the revolver and notes. Fitch views revolver refinancing critical before the credit facility becomes current.
Low Leverage Provides Flexibility: PBFX has low leverage and strong interest coverage relative to midstream peers. Leverage at YE 2022 is expected between 2.6x-2.8x, barring any unforeseen increases in spending or acquisitions. The partnership is expected to operate with modest leverage as it continues to utilize FCF towards debt reduction. Although 2022 EBITDA is expected to decline as some of the East Coast MVC's roll off, leverage is expected to continue trending lower over the rating horizon, supported by the partnership's deleveraging strategy. Fitch believes lower leverage is important to PBFX's credit profile due to the partnership's limited counterparty diversity.
Modest Size and Scale: The partnership is geographically diversified, with presence in four Petroleum Administration for Defense Districts' (PADD), although most of the assets and operations are concentrated on the East Coast. Fitch believes this operational concentration and the partnership's EBITDA of approximately $200 million, makes PBFX vulnerable to weak East Coast margins in the event of an outsized event or slowdown in the region's refining market.
Cash Flow Assurance: PBFX's operations demonstrate stable cash flows underpinned by long-term, take-or-pay contracts with PBF Holding, with an approximate seven-year weighted average contract life. PBFX provides services at fixed fee (including inflation escalators and certain increases in operating costs) with minimum volume commitments (MVC), limiting PBFX's commodity price sensitivity and providing some volumetric downside protection. Cash flow assurance, currently around 90% of revenues will remain high in the near term, but the payments from MVCs will step down over time.
Corporate Family Relations: PBFX is operationally and strategically integral to PBF Holding as PBFX provides it critical infrastructure. PBF Holding is the fourth largest independent refiner in the U.S. and its parent, PBF Energy Company LLC (PBF Energy) holds 100% of the general partnership interest and 47.9% of limited partner interests in PBFX.
PBF has historically supported growth at PBFX with drop down transactions, completing five drop-down transactions since inception. PBFX also retains a 10-year right of first offer to purchase certain logistics assets owned by PBF Holding in the event PBF disposes, sells or transfers those assets. Given that PBF directly benefits from the sustainable growth of PBFX through its ownership, Fitch believes that PBFX will continue to benefit from support from PBF Energy in the near term.
Parent Subsidiary Relationship: Fitch rates PBFX on a stand-alone basis. PBFX and PBF Holding are affiliate entities within the PBF Energy family. PBF Energy Inc. is the ultimate parent company with its primary subsidiaries being PBF Holding and PBFX. PBFX pays distributions to PBF Energy Inc. on its limited partner interest, which can be used to cover a portion of tax payments and distributions.
Fitch does not rate PBF Energy. The most important incentives are legal ties, which are deemed weak, as there is no debt at PBF Energy Inc., and PBFX does not provide upstream guarantees. There are also provisions in place that restrict payments to PBF Energy Inc.
In addition, there are no cross defaults that could occur elsewhere in the group that could impact PBFX. Even though PBFX is operationally integral to PBF Energy's core business, PBFX maintains a separate board of directors and financing function. Fitch believes there is legal insulation explicitly designed to support PBFX's stand-alone credit profile.
Derivation Summary
PBFX's leverage is strong for its rating category. Fitch expects PBFX's leverage between 2.6x-2.8x for YE 2022. PBFX's ratings reflect its strong strategic and operating ties to PBF Holding. The heavy dependence on PBF Holding could present an outsized event risk should there be an operating, production or financial issue at PBF Holding. The partnership is geographically well diversified with assets in four PADD's, but approximately 46%-50% of EBITDA is generated from assets in the East Coast (Delaware and Paulsboro, NJ).
PBFX is rated below Holly Energy Partners L.P (HEP; BB+/Stable). Like PBFX, HEP's rating is supported by stable cash flows that are largely minimum volume commitments from its investment grade sponsor and largest counterparty, HF Sinclair ('BBB-'/Stable). Fitch expects HEP's leverage to be under 4.0x in 2023. With adjusted EBITDA roughly half of HEP, scale and the significant exposure to PBF Holding are limiting factors to PBFX's ratings.
Relative to a 'BB-' rated issuer like Delek Logistics Partners, LP (DKL; BB-/ Stable), PBFX is geographically more diversified and has better leverage. Fitch expects DKL's leverage to be elevated at YE 2022 but reduce to around 4.0x YE 2023, trending lower in outer years. Like PBFX, DKL has significant counterparty exposure to its parent and sponsor, Delek US Holdings, Inc (Delek Holdings; BB-/Stable). While leverage metrics at PBFX is expected to be better than DKL, PBFX's rating is constrained by its primary counterparty, PBF Holding. Relative to a 'BB-' rated peer like NuStar (NS; BB-/ Stable), PBFX has better leverage, but significantly smaller scale of operations. NuStar does not have customer concentration like PBFX.
Key Assumptions
Fitch price deck for West Texas intermediate oil price of $95/bbl in 2022, $76/bbl in 2023, $57/bbl in 2024 and $50/bbl thereafter;
Revenues and EBITDA decline in 2022 as MVC's are reduced for some rail assets;
Capex spending in 2022 in line with management estimate;
Distributions held at current levels through 2023;
Notes due 2023 is refinanced and revolving credit facility is extended/refinanced;
No asset sale or equity issuance assumed.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Favorable rating action at PBF Holding will lead to positive rating action for PBFX, provided the factors driving a rating change at PBF Holding have benefits that accrue to the credit profile of PBFX;
Expected leverage (total debt with equity credit/ operating EBITDA) at PBFX is at or below 3.0x on a sustained basis, provided the rating of PBF Holding is no longer a constraint on PBFX's rating;
Should PBFX demonstrate a move towards further insulation from its reliance on PBF Holding, such that third-party revenues contribute at least 30% of total revenues with credit metrics remaining within sensitivities, Fitch may consider a separation between its IDRs and PBF Holding's.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Lack of progress towards addressing the secured revolver before it becomes current and unsecured notes due 2023 proactively and/or impairments to liquidity;
Negative rating action at PBF Holding will negatively impact PBFX's rating;
Expected leverage (total debt with equity credit/operating EBITDA) above 4.0X and/or Distribution Coverage below 1.0x on a sustained basis;
Material change to contractual arrangement or operating practices with PBF Holding that negatively impacts PBFX's cash flow or earnings profile;
Increases in capital spending beyond Fitch's expectation that have negative consequences for the credit profile (e.g. if not funded with a balance of debt and equity).
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity in Near Term: As of March 31, 2022, PBFX had approximately $474.8 million in available liquidity. Cash on the balance sheet was $53.3 million, in addition to the $421.5 million available under the $500 million senior secured revolver. The revolver includes a $75 million sub-limit for standby letters of credit and a $25 million sub-limit for swing-line loans. PBFX had letters of credit of $3.5 million outstanding under the revolver. The partnership's liquidity in the near term is considered adequate.
The revolver may be increased by an aggregate amount of $250 million, subject to lender's consent. It is secured by a first-priority lien on the asset of PBFX and its restricted subsidiaries that are joint and several guarantors under the facility.
The bank agreement for the revolver has three financial covenants: minimum consolidated interest coverage ratio is at least 2.5x, consolidated total leverage ratio which cannot exceed 4.5x and consolidated senior secured leverage ratio cannot exceed 3.5x. As of March 31, 2022, PBFX was in compliance with its covenants and Fitch expects PBFX to maintain compliance with its covenants in the near term.
PBFX also has $525 million unsecured notes due May 2023 which are co-issued by PBF Logistics Finance Corp, a wholly owned subsidiary of PBFX. The notes are guaranteed on a senior unsecured basis by all the subsidiaries of PBFX. In addition, PBF LLC, the general partner provides limited guarantee to the notes for the collection of principal amount, but is not subject to the covenants governing the notes.
Debt Maturity Profile: PBFX has a concentrated debt-maturity profile and is faced with the issue of debt refinancing. The revolver becomes current end of July 2022 and Fitch believes a maturity extension is likely due to the security backing the facility. The revolver can be extended for one year up to two occasions subject to lenders' consent. The unsecured notes are due May 2023, which the partnership also needs to address.
Issuer Profile
PBFX is a master limited partnership (MLP) that owns, leases, operates and develops crude oil and refined petroleum products terminals, pipelines, storage facilities, and other logistics assets that primarily support PBF Holding's refineries in the Northeast, Midwest, Gulf Coast, and West Coast of the U.S.
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.
Public Ratings with Credit Linkage to other ratings
PBFX's default risk profile is influenced by PBFH, which is its primary counterparty.
ESG Considerations
PBF Logistics LP has an ESG Relevance Score of '4' for Group Structure due to material related party transactions with its affiliate, PBF Holding, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
PBF LOGISTICS LP 
