What are the potential implications for Southwest Gas Holdings' credit ratings and debt covenants?

Fundamental view

The secondary offering of Centuri stock injects roughly $300‑$350 million of new equity into Southwest Gas Holdings (SWX). Because the proceeds are earmarked for general corporate purposes—including the repayment of existing term‑loan facilities and the refinancing of higher‑‑cost senior debt—the company will lower its net‑levered leverage ratio and improve its interest‑coverage metrics. Those are the two primary levers that the “Big Three” rating agencies (S&P, Moody’s, Fitch) monitor most closely for utilities and mid‑market energy distributors. A modest reduction in debt‑to‑EBITDA (from the current ~3.2× to the low‑2× range) typically translates into a “stable” or even a “positive‑outlook” rating action, especially when the balance‑sheet improvement is paired with a solid cash‑flow profile and a long‑dated, regulated revenue base.

Covenant angle

SWX’s existing credit facilities contain standard “maintenance” covenants—minimum net‑levered debt‑to‑EBITDA, a minimum fixed‑charge coverage ratio (FCCR) and a leverage‑covenant tied to the aggregate principal amount of outstanding term loans. The infusion of equity capital will be used to bring the net‑levered debt‑to‑EBITDA back under the covenant floor, thereby removing the risk of a technical default and the associated “cure‑period” penalties (e.g., higher interest spreads, restricted draw‑down rights, or even an event‑of‑default that could trigger a 30‑day cure). In short, the offering should tighten covenant compliance and give lenders a stronger safety cushion, which in turn reduces the probability of covenant waivers that could otherwise lead to rating downgrades.

Trading implications

1. Bond market: Expect a modest rally in SWX’s senior unsecured notes and term‑loan notes as the market prices in a lower default risk and a potential rating upgrade. The yield spread over comparable utility peers should compress by 10‑15 bps over the next 4‑6 weeks, provided rating agencies issue a “stable” outlook or a one‑notch upgrade.
   
2. Equity market: The equity side of the transaction is already priced in, so the stock will likely trade sideways or modestly higher on the news, but the real upside comes from the downstream credit‑rating impact. Keep an eye on any rating‑agency commentary in the next 30 days—if they signal a “positive outlook,” the equity could see a 3‑5 % bounce on the back‑of‑the‑rating lift.
   
3. Action: Maintain a long‑biased stance on the bond (or consider a short‑duration position if you already hold the notes) and hold the equity with a small upside target of ~4 % pending rating agency updates. Monitor covenant‑reset dates (typically quarterly) for any “cure‑period” activity that could temporarily pressure spreads.