Aris Water Holdings gets upgraded ratings from Moody’s, maintains stable outlook

Investing.com -- Moody’s Ratings has upgraded the Corporate Family Rating (CFR) of Aris Water Holdings, LLC (formerly known as Solaris Midstream Holdings, LLC) to B1 from B2. The upgrade also extends to the Probability of Default Rating (PDR), which has been raised to B1-PD from B2-PD, and the senior unsecured notes rating, which now stands at B2, up from B3. The Speculative Grade Liquidity rating of the company has also been upgraded to SGL-2 from SGL-3. The rating outlook for Aris has been revised to stable from positive.

In conjunction with these upgrades, Moody’s also assigned a B2 rating to the proposed $400 million senior unsecured notes due 2030 by Aris. The proceeds from these notes are intended to be used to redeem the company’s existing 7.625% notes due in 2026, including the accrued interest.

According to Sajjad Alam, Vice President of Moody’s Ratings, the upgrade is a recognition of Aris’ increased scale and EBITDA, reduced financial leverage, and improved ability to generate free cash flow. Moody’s expects Aris to continue adhering to conservative financial policies and disciplined capital allocation towards growth and shareholder distributions.

The B1 CFR is supported by Aris’ long-term fee-based water services contracts with large investment-grade oil and gas producers in the Permian Basin, minimal direct commodity price exposure, fee-based revenue, and low financial leverage. However, the CFR is constrained by Aris’ limited scale and operating history, significant customer and geographic concentration, exposure to volatile upstream drilling and development cycles, and business risks related to water handling, recycling, and disposal operations.

The new notes will be fully and unconditionally guaranteed on a senior unsecured basis by all of Aris’ existing subsidiaries. The senior unsecured notes are rated B2, one notch below Aris’ B1 CFR, due to their subordinated claim to the company’s assets behind the first-lien senior secured revolving credit facility.

Aris is expected to continue investing in high-return organic growth projects and seek opportunistic acquisitions to further expand its scale and scope of operations. Capital spending moderated in 2024 after significant investments in 2022-23, and management plans to spend $85-$105 million in 2025. The company is expected to generate at least $200 million of EBITDA and over $40 million of free cash flow in 2025, which should further reduce leverage and enhance financial flexibility.

Aris is expected to maintain good liquidity through mid-2026, as indicated by the SGL-2 rating. The company is expected to refinance the existing notes and use free cash flow to repay any remaining revolver debt balance. As of December 31, 2024, Aris had $29 million in cash and $44 million outstanding on its $350 million committed revolving credit facility, set to expire on October 12, 2027.

Aris’ CFR could be upgraded if the company significantly increases scale, diversifies its revenue stream with long-term fee-based contracts, and maintains debt/EBITDA below 1.5x. Conversely, the CFR could be downgraded if debt/EBITDA rises above 3x, liquidity weakens, or the company debt-funds shareholder distributions.

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