On March 9, 2016, the Wall Street Journal reported that investors in energy-related Master Limited Partnerships (“MLP Investors Face Tax Hit on Top of Big Losses”) face the prospect of “worse things than going to zero” as a prospective “wave of expected bankruptcy filings and debt restructurings could trigger taxes for investors at a number of energy firms”
Master Limited Partnerships (MLPs) are a corporate structure that do not pay any taxes at the corporate level, but instead pass along their income – and certain tax burdens – to shareholders.
Unfortunately, the “collapse in oil and gas prices has exposed the structure’s double-sided risk: Investors with potentially worthless shares – or units, as they are known – may nonetheless owe taxes on debt that is forgiven in a bankruptcy or an out-of-court restructuring” since “debt forgiven in a restructuring counts as noncash income, or cancellation of debt income, which creates a tax liability for investors without an associated cash distribution.”
As noted by the Wall Street Journal, “the roughly 60% plunge in oil prices since the summer of 2014 already has sent a number of energy companies into bankruptcy court, and more are expected to follow.”
Clearly investors have soured on MLPs, which sometimes yielded more than 10% a year at a time when Treasury bonds were yielding pennies on the dollar, as many of them have cut or halted their distributions to investors. For example, the “Alerian MLP Index, which tracks about 50 large energy partnerships, has lost nearly half its value over the past 18 months.”
Among the energy vulnerable MLPs cited in the article, whose “debt is trading at distressed levels,” are Linn Energy LLC (NASDAQ – LINE), Breitburn Energy Partners LP (NASDAQ – BBEP) and Atlas Resource Partners LP (NYSE – ARP).
Many retail investors clearly “weren’t told they were buying a high-risk product with potential tax traps” and a number of industry professionals openly have questioned whether MLPs should ever have been recommended to investors in an account that was not tax-deferred (such as a retirement account) which would have shielded them from the negative tax implications.
As Merrill Lynch recently noted in a February 17th research report (“Master Limited Partnerships: Malaise, Loathing, Pessimism”) which accompanied the downgrading of 7 MLPs, this is a “humiliated asset class” for which “the humiliation continues.”
For many retail investors, the question remains just how expensive will their financial humiliation ultimately be.
If you are an individual or institutional investor who has any concerns about your investment in any Master Limited Partnership (MLP), please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).