Bangkok--22 Jan--Standard & Poor's
NEW YORK (Standard & Poor's) Jan. 21, 2014--Standard & Poor's Ratings Services today said it assigned its 'BBB-' issue rating on Icahn Enterprises L.P.'s proposed senior unsecured notes issuance. Icahn will issue the notes in a single tranche due in 2022 in an amount to be determined by market conditions. The long-term issuer credit rating on Icahn remains 'BBB-', and the outlook is stable.
Icahn will use the proceeds from the proposed issuance for general partnership purposes, which we believe could include a combination of any of the following: new acquisitions, investing in existing private-equity holdings, or contributing to the firm's hedge fund. We do not expect the firm to hold proceeds as cash on the balance sheet for a significant period of time.
Pro forma for the transaction, we expect cash flow to the holding company after operating expenses will cover interest expense by below 2x in 2014. We continue to view the firm's relatively low interest coverage as a weakness of the rating, but new, dividend-based cash flow streams from CVR Energy, CVR Refining, American Railcar, and American Railcar Leasing LLC have added a more recurring and predictable element to the firm's earnings profile that was previously lacking.
Icahn's debt-to-equity leverage was 0.5x as of Sept. 30, 2013, which is low relative to historical levels. We expect this transaction will increase leverage closer to or within Icahn's more normal 0.6x-0.8x range, but still below our 1.0x threshold for a downgrade. Based on the volatility in the equity value of several of Icahn's investments and considering our view that the current equity markets are richly valued, our 'BBB-' rating incorporates our expectation for the company to maintain a moderate cushion relative to our 1.0x threshold to allow for market fluctuations.
As of Sept. 30, 2013, Icahn held $958 million in cash and equivalents. The firm targets to hold up to $1.0 billion in cash to have the ability to make opportunistic investments and support its debt service needs. Our rating incorporates our expectation that cash at the holding company will cover interest expense by at least 2.0x. We consider the investment segment equity attributable to Icahn to be a secondary source of liquidity. This balance increased to $3.6 billion as of Sept. 30, 2013, from $2.4 billion as of Dec. 31, 2012.
Our rating on Icahn reflects the firm's strong liquidity, proven ability to execute activist strategies, the portfolio's adequate diversity, and management's track record of realizing gains on turnaround investments. The most salient limit on the rating is the firm's private-equity investments' vulnerability to a fragile U.S. economic recovery and the heightened risk that arises from management's large, opportunistic investments. Principal owner Carl Icahn's contribution has both advantages and disadvantages. His personal contacts and experience generate investment opportunities, and he has a reputation for creating long-term enterprise value. However, his prominence also causes key-man risk--the potential overreliance on one or a few individuals within the management team--and complicates corporate governance.
The stable outlook reflects Icahn's strong liquidity position and our expectation for the firm to maintain adequate leverage metrics for the 'BBB-' rating. We expect the firm's financial performance to be solid if the U.S. economy continues to improve, but holdings in highly cyclical companies leave the firm vulnerable in the event of a correction or extended downturn. We could downgrade Icahn if its debt-to-equity ratio exceeds 1.0x on a sustainable basis or if its cash balance deteriorates to less than 2.0x its annual interest obligations. The removal of Mr. Icahn from some or all leadership positions would be a negative rating factor, but it would not, by itself, result in a downgrade. An upgrade is unlikely until the firm starts to generate more substantial and reliable recurring earnings.