Assessing the Risks of NGL Energy Partners LP Preferred C Units: A Case for Selling High-Yield Preferred Securities

High-yield preferred securities often promise attractive returns, but they come with hidden structural risks that can erode investor confidence. NGL Energy Partners LP's 9.625% Class C Fixed-to-Floating Rate Cumulative Redeemable Perpetual Preferred Units (NGL.PRC) exemplify this duality. While the current yield of 13.50% appears enticing, a closer examination of the security's design, liquidity profile, and the issuer's financial dynamics reveals a compelling case for a sell position.

Structural Vulnerabilities: Perpetual Uncertainty and Floating Rate Exposure

NGL.PRC is a perpetual preferred unit, meaning it has no maturity date and relies on the issuer's discretion for redemption. This structure inherently exposes investors to indefinite reinvestment risk. The fixed dividend rate of 9.625% remains in place until April 15, 2024, after which it transitions to a floating rate tied to Three-Month LIBOR plus 738.4 basis points. Given the current macroeconomic climate—marked by rising interest rates and inflationary pressures—this shift could drastically reduce the security's appeal. If LIBOR rises, the effective yield on NGL.PRC could plummet, eroding its value further.

Moreover, the units are trading at a 13.52% discount to their $25 liquidation preference, a discount that reflects market skepticism about the issuer's ability to redeem the units or maintain consistent dividend payments. This discount is not merely a function of yield-seeking demand; it signals underlying concerns about NGL Energy Partners LP's financial resilience.

Illiquidity and Market Sentiment: A Double-Edged Sword

Liquidity is a critical factor in assessing preferred securities, yet NGL.PRC lacks transparency in key metrics. While the broader credit markets have seen tighter bid-ask spreads in early 2025, specific data on NGL.PRC's trading volume and spread remains absent. This opacity suggests low trading activity, which can exacerbate price volatility and make it difficult for investors to exit positions without incurring significant slippage.

The perpetual nature of NGL.PRC compounds this issue. Unlike traditional bonds with defined maturities, perpetual preferreds are more susceptible to market sentiment shifts. A minor downgrade in the issuer's credit profile or a rise in interest rates could trigger a sharp sell-off, as investors reassess the security's risk-reward balance.

NGL Energy Partners LP's Financial Health: Mixed Signals

NGL Energy Partners LP's recent financial performance offers a mixed picture. The company reported a $30.3 million income from continuing operations in Q1 2026, driven by its Water Solutions segment, which processed 2.77 million barrels of produced water daily—a 12.4% increase year-over-year. However, the Crude Oil Logistics segment saw a $13.4 million decline in operating income due to lower production and crude prices. This segment's volatility underscores the company's exposure to energy market fluctuations, which could strain its ability to sustain dividend payments.

While NGL's total liquidity stands at $391.6 million as of June 30, 2025, this figure includes $37 million in borrowings used for butane inventory. The company's debt management efforts—such as repurchasing $19 million of its 2032 Senior Notes and 70,000 Class D preferred units—signal a disciplined approach. However, these actions do not mitigate the structural risks inherent in NGL.PRC.

Credit Ratings: A Missing Safety Net

S&P Global recently upgraded Global Net Lease's credit rating to BB+ from BB, but NGL Energy Partners LP itself has not received a specific rating for its preferred units. The absence of a formal credit rating for NGL.PRC leaves investors without a clear benchmark for assessing default risk. While the parent company's improved credit profile is positive, it does not guarantee the same for its perpetual preferred securities, which are subordinate to other claims.

Investment Implications: Why a Sell Position Makes Sense

The combination of structural vulnerabilities, illiquidity, and uncertain redemption prospects makes NGL.PRC a high-risk holding. The security's perpetual nature and floating rate structure expose it to macroeconomic headwinds, while its discount to liquidation preference reflects market doubts about the issuer's long-term stability. For income-focused investors, the high yield is a trap: it masks the potential for significant capital losses if interest rates rise or the issuer's creditworthiness deteriorates.

Conclusion: Prioritizing Capital Preservation

In a market environment where liquidity and credit risk are paramount, NGL.PRC's structural flaws outweigh its yield advantages. Investors should consider exiting their positions to avoid potential losses from rate hikes, redemption delays, or issuer-specific risks. For those seeking income, alternatives with clearer maturity dates and stronger credit ratings may offer a safer path forward.