Hopefully, you’ve already read the previous installments of this series. MLPs Making the Grade, Part 1 explained how a credit rating agency evaluates an MLP, and whether you should care about that as an equity investor. And Part 2: Credit Ratings as MLP Report Cards showed that changes in MLP credit ratings tended to be retrospective rather than predictive of performance.
Alerian also talks about investment grade ratings in our factsheets (available here), which list the percentage of each index that is classified as investment grade. For example, the Alerian MLP Index (AMZ) is 70.2% investment grade, and the Alerian MLP Infrastructure Index (AMZI) is 74.1% investment grade.
In this piece, we provide an exhaustive list of all MLPs with their respective credit ratings, broken out by agency and shaded to indicate whether a company is considered investment grade.
Most notable for equity investors are those companies on the cusp of being rated investment grade, which are NuStar Energy (NS) and Targa Resources Partners (NGLS). Please note that there is quite a number of new, large, low-yielding MLPs that have not yet received a rating.
Investment grade MLPs tend to have slightly lower yields than average as investors require less return for a blue-chip investment. Despite these lower yields and the stability implied by their investment grade rating, in the past year, four investment grade MLPs raised their distributions by more than 20%. They are Phillips 66 Partners (PSXP) (35%), MLPX (MPLX) (25%), EQT Midstream Partners (EQM) (25%), and Sunoco Logistics Partners (SXL) (21%). Notably, the first three are dropdown MLPs with supportive parents that would have sold them the assets regardless of their credit rating.
Only 19 MLPs (out of 114) are considered investment grade. As with traditional corporations, these tend to be the larger names. But not always, as neither MarkWest Energy Partners (MWE) nor Cheniere Energy Partners (CQP) has received an investment grade rating, despite having market caps over $10 billion. The smallest MLP with an investment grade rating is Boardwalk Pipeline Partners (BWP) with a market cap of $3.7 billion.
In total, 62% of energy MLP market cap is concentrated in investment grade names. The association of large MLPs with investment grade ratings is not necessarily inherent. But as an investment grade rating implies historical success, and successful companies tend to grow, the correlation makes sense.Data as of July 14, 2015. Year-over-year distribution growth calculated from the second quarter of 2014 to the second quarter of 2015.