Targa Preferred: Good Credit Trading Like Dividend-At-Risk Equity

Summary
Targa Resources Partners' 9% cumulative preferred (NGLS-A) has traded sharply lower since its October IPO, consistent with the common units (NGLS) and other midstream MLP common equities.
NGLS-A is less than 3% of Targa Resources Partners' total debt and should trade in-line with its subordinated debt, not its common equity.
All NGLS-A dividends must be paid before any NGLS dividends can be paid to anyone - NGLS' shareholders or Targa Resources Corporation (TRGP).
As a bond surrogate, NGLS-A is deeply undervalued relative to Targa's subordinated debt.
In October, Targa Resources Partners (TRP, ticker NGLS for the common units), the master limited partnership of Targa Resources Corporation (TRC, ticker TRGP for the common stock) issued a 9.0% fixed-rate, cumulative preferred stock, ticker NGLS-A at $25. In November 2020, NGLS-A changes from 9% fixed to one-month Libor plus 771 bps floating. It currently trades in the $16-17 range.
NGLS-A has sold off in-line with NGLS over the past two months, i.e., as if it were equity-linked and at risk of a dividend cut. This is a mistake. Unlike the recent Kinder Morgan preferred (KMI-A), NGLS-A is not equity-linked and there is no mandatory conversion. NGLS-A represents less than 3% of all TRP debt. At this percentage of the debt, suspending the dividend would offer no financial breathing room to TRP either as a stand-alone company or as an operating partnership within a rolled-up TRC/TRP. This... Read more