What: Shares of Williams Companies (NYSE:WMB) are down more than 10% as of 3:30 p.m. ET after Fitch downgraded its credit rating to BB+, or junk status. As you might expect, Williams subsidiary partnership Williams Partners (NYSE:WPZ) has also seen its shares decline close to 10% on the news, as well as Energy Transfer Equity (NYSE:ET), which is in the process of acquiring Williams Companies.
So what: One thing master limited partnerships hold very dearly is their credit ratings, especially an investment-grade credit rating. When they want to build a new major capital project, they need to tap the debt markets to finance them, so the better their credit rating, the better the interest rate, the higher the rate of return on a project. Getting downgraded to junk status will likely mean Williams will not get as favorable rates on new debt, which makes that $30 billion backlog of projects look a little less compelling than it did before.
This also will likely have an impact across all of the companies with which Williams is associated. With a junk-rated status, Williams Partners may also find it harder to finance new projects, or it could possibly pay higher costs for projects that are dropped down to it from the parent company.
In fact, as part of the downgrading of the parent company, Williams Partners also saw its credit rating cut from BBB to BBB-, just one step above junk status. It was also mentioned as part of the credit rating note that Williams could find itself at an elevated amount of counterparty risk from Chesapeake Energy (NYSE:CHK). Chesapeake represents about 20% of Williams' revenue, and it's not doing well as of late. Any issues at Chesapeake could result in a major loss of revenue for Williams.
To add insult to injury, Energy Transfer Equity is dealing with a rather high debt load itself, even before the completed acquisition of Williams. If Williams' debt is being downgraded to junk status, it could tip the scales of Energy Transfer into junk status.
Now what: Most days, daily news stories and major price movements aren't going to alter the investment thesis on a company. In this case, though, a company's debt rating deteriorating is definitely something worth paying attention to. It may not alter much of the current operations of the company, but it could certainly impact the longer term, when Williams tries to go to the capital markets to fund its growth. Also, with so many connected parts between Williams and Energy Transfer, we're almost bound to see some consequences across all of the other companies.
Until we see Williams or Energy Transfer make some moves to shore up the balance sheet, like cutting distribution, then it may be best to shy away from any of the stocks mentioned here. There are other opportunities in the pipeline/master limited partnership space that look to have much more solid footing.