Strong Credit Ratings Dominate Midstream/MLPs

by Kyle Richards of VettaFi, 10/29/25

Summary

  • An investment-grade credit rating materially lowers the cost of debt needed to fund large-scale projects or acquisitions.
  • Larger midstream companies tend to have strong credit ratings, causing major midstream indexes to be heavily weighted towards high-quality, investment-grade names.
  • The midstream sector offers generous yields, largely from companies with strong credit profiles.

Strong credit ratings remain a key feature for midstream companies, providing significant cost savings on debt. The subsector is largely dominated by investment-grade players, which also offer attractive dividend yields. Learn more below about the importance of an investment-grade rating and why midstream indexes are skewed towards these creditworthy names.

Why Are Credit Ratings Important for Midstream?

Midstream companies commonly tap the debt markets for building new projects or funding acquisitions, and debt is an important part of their capital structure. Historically, midstream companies often used 50-50 debt and equity for funding projects, though that can vary. Instead of issuing equity, midstream companies largely use retained cash flow to fund the equity component today. A strong credit rating remains important for accessing debt markets with a lower interest rate.

A credit rating of BBB or above (A, AA, AAA) is considered investment-grade, while lower ratings are considered high-yield (BB, B, CCC, etc.). As of October 17, the average yield difference between a 10-year BBB rated bond and a 10-year BB rated bond was 120 basis points (5.05% vs. 6.25%). The yield difference is notable and can impact project returns.

Besides a company’s main credit rating, there are also issue-specific ratings for debt tied to a certain asset. A recent example is the Coastal GasLink Pipeline, a joint venture owned by partners TC Energy (TRP CN), KKR, and AIMCo. The partners created a project-level entity, Coastal Gaslink Pipeline LP, which issued $7.15 billion in senior secured notes in mid-2024. This debt is secured by the pipeline itself, so its rating is tied directly to the underlying pipeline’s contracts and cash flows. This structure can also result in a stronger credit rating: While TRP’s corporate rating is BBB+, these secured project bonds received an A- rating.

Leverage Ratios Have Improved

While rating agencies consider a number of factors, investors often look at leverage ratios (measured as net debt/adjusted EBITDA) to gauge financial health. Midstream leverage ratios have come down noticeably over the last several years. A decade ago, it was common for companies to have leverage around 5x (read more), whereas 3–4x is more common today. Some companies have even lower targets.

In 2023, industry heavyweight Enterprise Products Partners (EPD) lowered its long-term leverage target range midpoint from 3.5x to 3.0x. The move, which effectively shifted the goalposts for the sector, was quickly validated when S&P upgraded EPD to an A- rating, making it the only midstream company to hold that rating. Other companies, like Plains All American (PAA/PAGP), followed suit by lowering their own targets.