Southcross Energy Partners Hit By JP Morgan Downgrade After 10K Delay

J.P. Morgan’s Andrew R. Burd downgraded the rating on Southcross Energy Partners LP SXE from Neutral to Underweight.

The company filed it’s a FORM 12b-25 on March 16, notifying the SEC of a delay in the 10-K filing. “The filing noted that SXE does not expect to remain in compliance with all credit facility financial covenants throughout 2016 absent continued sponsor equity cures,” Burd mentioned.

Avenues to Solvency

Prior to this filing, the analyst expected three means of solvency for Southcross Energy Partners, robust 4Q15 results, volume growth during 2016 and persisting voluntary sponsor equity cures.

However, the filing potentially eliminates the first two avenues, with cures remaining the only lever for the company.

“As debt covenant compliance likely depends on continued cures going forward, we view SXE units as an out-of-the-money call option on a sharp Eagle Ford production increase within the next 6-18 months,” Burd pointed out.

Sponsor Equity Cures Could Help

When Southcross Energy Partners announced its 2Q15 results, it also stated that three private equity sponsors had agreed to support the company’s balance sheet through voluntary equity cures.

“We expect the cures, if continued by the sponsors, may potentially prevent covenant violations into 2017,” Burd stated.

The analyst also noted that the high leverage of public buyers of G&P assets prevents them from paying a premium for the company’s assets, raising the barriers to a potential sale.