Fitch Ratings has upgraded GIP III Stetson I, L.P.'s and GIP III Stetson II, L.P.'s (collectively GIP Stetson) Long-Term Issuer Default Rating (IDR) to 'BB-' from 'B+'.

Fitch has also upgraded GIP Stetson's senior secured rating to 'BB-'/'RR4' from 'B+'/'RR4'. The Rating Outlook is Stable.

Debt reduction drives the upgrade. Faster-than-expected debt reduction has been helped by its general partner guiding EnLink Midstream LLC (EnLink) to prioritize (relative to Fitch's former understanding) the sum of (a) capex for the core growth strategies and (b) share repurchases, over large increases in unit distributions (previously, Fitch had forecasted repurchases below the recent run-rate). GIP Stetson has participated ratably in the repurchases, which triggers a prepayment provision.

As EnLink's EBITDA has grown faster than GIP's distributions received, Fitch will now use proportional consolidation along with its customary standalone leverage metric.

GIP Stetson's ratings are based on Fitch's forecast that proportional consolidated leverage in the 2025-2026 time-frame will around 5.0x. The ratings are also based on EnLink's credit quality.

Key Rating Drivers

Parent-Subsidiary Linkage (PSL): Fitch regards GIP Stetson as EnLink's parent by virtue of GIP Stetson holding indirectly the general partnership stake in EnLink. Fitch views there to be some legal ringfencing between the entities, by virtue of both the conventions and provisions of GIP Stetson's general partnership role, as well as a financial covenant contained in EnLink's revolver. The extent of legal ring-fencing is viewed as porous (in the middle of insulated and open). In averaging the rest of the sub-factors in PSL, Fitch views Access/Control to also be porous. Fitch views the consolidated group profile to be 'bb'. GIP Stetson's IDR is notched down one from this consolidated group profile to reflect circumstances stemming from its status as a structurally subordinated borrower.

Structural Subordination: EnLink's capital structure includes hybrid securities to which Fitch applies 50% debt credit, 50% equity credit. Equity credit is only allowed if coupons to the hybrids are allowed to be deferred. EnLink can only defer its payment of said coupons if it shuts off the dividend. Dividends are GIP Stetson's 'first way out' (secondary/tertiary/etc. sources of debt service are a six-month debt service reserve instrument, selling common units, and an equity infusion). The above 'waterfall' scheme points to the fact that the GIP Stetson loan is meaningfully structurally subordinated.

In a period of challenged conditions in 2019-2020 (not the least of which was COVID), EnLink continued to pay the coupon on the hybrid, and it only cut the dividend in part, not in whole.

Proportional Consolidated Leverage: Fitch forecasts 2025-2026 GIP Stetson proportional consolidation leverage to be at or under 5.0x. For a midstream company with no structural subordination and with EnLink's business risk, under 5.0x leverage (i.e., the value of GIP Stetson's proportional consolidation leverage) would be a 'BB' area company. Due to structural subordination, GIP Stetson is rated 'BB-'.

Derivation Summary

Fitch in its coverage portfolio has no company in its portfolio in terms of GIP Stetson having a partial (not entire) economic stake in a subsidiary, as well as the general partnership stake.

Absent a comparable as to 'holdco' structure, one can bring to the fore that the derivation of GIP Stetson's rating does, indeed, relate its subsidiary. Fitch forecasts 2025-2026 GIP Stetson proportional consolidation leverage to be at or under 5.0x. For the same interval, the Fitch forecast for EnLink is more than a turn of leverage lower. EnLink is solidly positioned in its rating category, i.e., not weakly positioned in its rating category. The consolidated group profile of the family is viewed as being 'bb'. GIP Stetson is rated 'BB-' due to circumstances related to structural subordination.

Key Assumptions

Distributions into GIP Stetson from EnLink are level;

Interest expense reflects Fitch Global Economic Outlook rates;

GIP Stetson continues to ratably participate in future EnLink unit re-purchase programs that are sized approximately as big as the just-announced 2024 program.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Though unlikely, GIP Stetson demonstrating proportional consolidated leverage below 4.0x might merit a positive rating action.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

An expectation that GIP Stetson's leverage will be inconsistent to achieving proportional consolidated leverage of at or under 5.0x by 2025-2026;

An expectation that GIP Stetson's stand-alone leverage will be at or above 6.0x;

An expectation that GIP Stetson's stand-alone interest coverage will be below 1.8x;

Significant deterioration of credit profile at EnLink.

Liquidity and Debt Structure

Manageable Liquidity: Fitch expects GIP Stetson will have sufficient liquidity to service its interest expense and debt amortization requirements under EnLink's current distribution policy. Mandatory prepayments resulting from the excess cash flow provision and unit dispositions could facilitate further deleveraging in the future.

GIP Stetson has a debt service reserve account to supplement liquidity. The account provides six months of backup liquidity to holders of the term loan in the form of bank issued letters of credit written in favor of the collateral agent. The obligation to repay the letter of credit resides at an entity above GIP Stetson in the ownership chain.

Issuer Profile

GIP Stetson is an entity that owns an approximately 45% equity interest in EnLink Midstream LLC. GIP Stetson is an investment of infrastructure private equity company, Global Infrastructure Partners.

Summary of Financial Adjustments

GIP Stetson reports its financial condition on a combined financial statements basis. GIP Stetson is considered by U.S. GAAP to be an investment company. Fitch assesses GIP Stetson's leverage through two calculations. Stand-alone leverage is the following ratio: GIP Stetson debt in the numerator, and actual distributions to GIP Stetson in the denominator. Proportional consolidation leverage is built up with a numerator that is the product of GIP Stetson's ownership stake and EnLink's EBITDA, and the denominator is the sum of (a) GIP Stetson's loan amount and (b) the product of GIP Stetson's ownership stake and EnLink's deemed debt. 'Deemed debt' reflects hybrid criteria pertaining to EnLink's preferred stock.

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.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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