Fitch Upgrades NOVA Chemicals’ IDR to ‘BB’; Outlook Positive
The ratings are based on NOVA’s strong operating performance over the past several quarters and its significantly improved credit profile following its acquisition by Abu Dhabi-based international Petroleum Investment Company (IPIC; Fitch IDR ‘AA/F1+’) in 2009.
NOVA benefits from robust demand and tight supply in its core Olefins/Polyolefins segment, which mainly produces ethylene and polyethylene. The resulting favorable pricing environment coupled with low costs for light, natural gas-based feedstock has resulted in high operating profits and margins. In the last 12 months (LTM) to March 31, 2012, NOVA had operating EBITDA of approximately $1.3 billion, corresponding to a margin of 24.8%, based on $5.3 billion revenues from continued operations.
The company’s performance resulted in significant LTM free cash flow of $885 million, based on $1,149 million of cash flow from operations and $252 million of capital expenditures. Fitch expects NOVA to continue to generate meaningful free cash flow in 2012.
In January 2012, NOVA repaid its $400 million 6.5% notes. Repayment and stronger operating performance reduced the company’s gross balance sheet debt to EBITDA leverage to 1.1x. Gross balance sheet debt of $1.4 billion includes $219 million outstanding balance under the company’s accounts receivables securitization program, which the company now reports on balance sheet.
The strengthening of the company’s credit profile partially mitigates the key ratings concerns, the underlying price volatility and the demand and supply cyclicality of commodity chemicals. Prices for the company’s commodity products sold to third party customers (ethylene, polyethylene, polystyrene and by-products) are volatile as they follow the cyclicality of the industry, which is not only influenced by the economic demand cycle but also by the industry’s supply dynamics.
NOVA has minimal short-term debt maturities, but in November 2013 $400 million of floating rate notes mature. Long-term maturities include the $350 million notes due 2016, $350 million notes due 2019 and $100 million notes due 2025. Fitch expects NOVA to opportunistically address the 2013 maturity either by refinancing or repaying the notes with cash on-hand.
The Positive Outlook is based on Fitch’s expectation that the favorable ethylene and polyethylene industry dynamics in North America will remain in place at least over the next several quarters. Costs for light feedstock are expected to remain low and, despite the announced capacity additions, ethylene supply should remain tight. Fitch expects that NOVA will continue to generate meaningful profits and cash flows over these quarters as announced industry capacity additions will come online only gradually and over an extended period of time.
NOVA has robust liquidity that will enable the company to fund working capital and capital expenditure requirements and to withstand less favorable industry conditions, if a reversal of the positive dynamics were to occur. At March 31, 2012, NOVA had liquidity of $1,242 million, consisting of $694 million cash on-hand and $548 million available under its syndicated and bilateral credit facilities.
NOVA’s main $425 million senior secured credit facility, which matures in December 2015, is governed by a senior-debt-to-cash-flow covenant of max. 3x and a debt-to- capitalization covenant of max. 60%. NOVA had ample room under these covenants at March 31, 2012. Fitch expects the company to remain in compliance throughout the lifetime of the facility. The facility is secured by the net book value of assets in Canada, including NOVA’s interest in the Joffre, Alberta chemical complex and the Corunna, Ontario facility. The value of the collateral justifies one notch rating differential over the IDR and the senior unsecured debt.
In addition, NOVA has $140 million senior unsecured bilateral revolving credit facilities, which are not governed by the financial covenants described above. Of these facilities, $40 million expires in September 2013 and $100 million in September 2015. Additional liquidity comes from the company’s $225 million A/R securitization programs, which is governed by the same set of financial covenants as the $425 million secured facility, and a $125 million bilateral LC facility.
Catalysts for positive rating actions include continued strong operating profits and cash flows over the next several quarters as well as further reductions in leverage levels. Positive rating actions could also stem from hard (legally enforceable) credit support from IPIC.
Catalysts for negative rating actions include a dramatic deterioration of supply/demand balances, particularly against the backdrop of additional capacity coming online in North America, or a return to recessionary economic concession, which would reverse the company’s recent operating and financial performance.
Fitch upgrades the following ratings for NOVA:
–Long-term IDR to ‘BB’ from ‘BB-’;
–Senior unsecured revolving credit facilities to ‘BB’ from ‘BB-’;
–Senior unsecured notes and debentures to ‘BB’ from ‘BB-’.
Fitch affirms the following rating for NOVA:
–Senior secured revolving credit facility at ‘BB+’.
The Rating Outlook is Positive.
Additional information is available at ‘www.fitchratings.com’. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
–’2012 Outlook: North American Chemicals Industry’ (Dec. 22, 2011);
–’Corporate Rating Methodology’ (Aug. 12, 2011);
–’Liquids Rich Shale Boom — A Tailwind for North American Chemicals’ (April 18, 2011);
–’Rating Chemical Companies’ (May 13, 2010).
Applicable Criteria and Related Research:
2012 Outlook: North American Chemicals Industry
Corporate Rating Methodology
Liquids-Rich Shale Boom — A Tailwind for North American Chemicals
Rating Chemical Companies Sector Credit Factors
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