NGL - CrossingBridge Advisors - NGL Energy Partners: An Attractive Event-Driven Opportunity

2023-10-19 10:00:00 ET

Summary

• NGL Energy Partners LP is focusing on de-leveraging and has repurchased some of its bonds.
• The company intends to repay its 6.125% unsecured bonds by the end of March 2024.
• NGL is prohibited from making distributions to MLP unit holders until it has paid preferred dividends, but catch-up payments are anticipated in late 2024.

The following segment was excerpted from this fund letter.

NGL Energy Partners LP ( NGL )

6.125% Unsecured Notes due 3/1/25, 7.50% Senior Secured Notes due 2/1/26, Series B Preferred Stock

NGL Energy is a diversified midstream master limited partnership ((MLP)) that provides transportation, storage, marketing and other logistics services for crude oil, liquid hydrocarbons, and water generated as part of energy production.

Experiencing a sharp decline in EBITDA during 2020, NGL repaid its asset-backed loan facility and bridge loan in January 2021 by issuing a 7.50% senior secured note due 2/1/26. Given elevated pro forma net leverage, bond purchasers required a covenant preventing the company from paying dividends until total leverage was reduced below 4.75x EBITDA.

Thus, since that bond was issued in January 2021, the company has keenly focused on de-leveraging. “Walking the talk,” the company partially repurchased its 7.50% unsecured notes, due 11/1/23, during 1Q23, ultimately calling the remaining bonds, of which we were holders, at par on 3/31/23.

Concurrent with our initial purchases of the unsecured bonds in January 2023, we began to purchase the 7.50% senior secured notes due 2/1/26. With conservative secured leverage and expectations for continued de-leveraging, we were comfortable purchasing these bonds at a weighted average price of 95.8, providing a yield to maturity averaging of 9.14% and the opportunity for a higher rate of return if the company followed through on its stated intention to repay this bond before it became a current liability on 2/1/25.

To that end, management expressed its intention to repay the 6.125% unsecured bonds, due 3/1/25, no later than the end of March 2024. Still able to purchase the bonds at a discount, we added to the position in the 6.125% bonds in late August, and, in addition, have been actively trading the NGL Series B Preferred Stock.

The preferred shares have been accruing their dividend at a rate that resets each quarter, currently 12.783%, and, as of quarter-end, are trading at nearly a 20% discount to their liquidation value which continues to increase with each dividend deferral.

As the company is prohibited from making distributions to MLP unit holders until it has paid the preferred dividends that are in arrears and resumed the cash dividend to the preferred shareholders, we anticipate significant catch-up payments as early as late 2024 if the company succeeds in refinancing its capital structure.

NGL is a good example of a series of attractive, well-grounded investments, that “advance the runner” without “swinging for the fences.”

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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