Business News
Fitch Upgrades NOVA Chemicals After Acquisition by IPIC
Wednesday 08. July 2009 - Fitch Ratings has taken the following rating actions on the Issuer Default Rating (IDR) and outstanding debt ratings of NOVA Chemicals Corporation (NOVA) after the closing of its acquisition by the International Petroleum Investment Company (IPIC), the investment arm of the Emirate of Abu Dhabi. The company's Rating Outlook is Stable.
Fitch took the following actions:
–IDR upgraded to ‘B+’ from ‘B-‘;
–Secured revolver upgraded to ‘BB+/RR1’ from ‘BB-/RR1’;
–Series ‘A’ preferred notes upgraded to ‘BB+/RR1’ from ‘BB-/RR1’;
–Senior unsecured revolver revised to ‘B+/RR4’ from ‘BB-/RR1’;
–Senior unsecured notes revised to ‘B+/RR4’ from ‘BB-/RR1’.
The rating action reflects the improvements to NOVA’s credit profile following the closing of its acquisition by IPIC (IDR ‘AA/F1+’ by Fitch). To date, NOVA has received tangible credit support from IPIC of $350 million, comprising a $150 million backstop facility (used to repay a portion of NOVA’s $250 million 7.4% notes due earlier this year) and a $200 million equity injection at closing. In addition, the company has secured covenant relief from lenders for all of its facilities until 2010. Previous covenants, including the restrictive net-debt-to-cash-flow covenant, have now been replaced by a minimum EBITDA test.
Fitch notes that IPIC has a track record of supporting its investments – including a shareholder loan and dividend forbearance for its investment in petrochemical company Borealis, and the extension of working capital credits for Hyundai Oilbank in Korea. While we believe it likely that IPIC would offer additional credit support to NOVA in the case of further downside in the chemicals markets, several features of the deal suggest that the parent-subsidiary linkage in this case is weak, which limits the ratings uplift associated with the link to the parent. In terms of legal ties, there are no explicit credit guarantees from IPIC to NOVA, and the company anticipates that any refinancing of current debt will take place at the subsidiary rather than parent level. In addition, feedstock integration does not appear to be a key driver of the deal, as feedstock supplies at NOVA’s main Joffre, Alberta olefins/polyolefins plant will continue to be sourced locally (i.e. AECO natural gas).
Post-closing, NOVA is expected to have $1.7 billion in debt on its balance sheet, comprising approximately $610 million in bank debt and $1.1 billion in senior notes. Refinancing requirements are expected to remain steep, with maturities of $814 million expected due in the first quarter of 2010 as of the transaction close. At the same time, fundamentals in the North American ethylene and polyethylene markets remain soft. As projected by Fitch, NOVA will be modestly free cash flow positive in 2009 (note that Fitch assumed NOVA’s shareholder would not take distributions from its subsidiary in 2009). However, Fitch expects EBITDA will remain depressed in 2009, resulting in debt/EBITDA leverage metrics which are weak for the rating category at over 6.0 times (x). Looking forward, the main catalysts for an upgrade to NOVA’s rating continue to center on speed of the recovery in underlying ethylene and polyethylene markets, and how quickly NOVA applies free cash flow to de-lever from current levels. Catalysts for a downgrade include an inability by NOVA to refinance current debt maturities, or an unwillingness by IPIC to support its investment in the event of a further downside scenario in the chemicals market.
In the first quarter of 2009, NOVA’s polyethylene sales totaled 771 million pounds, up slightly from the 747 million pounds seen in the fourth quarter but well below the 916 million pound level seen in the first quarter of 2008. NOVA’s feedstock cost advantage over Gulf Coast oil- based ethylene crackers (the ‘Alberta Advantage’) averaged $0.04/lb in the first quarter versus $0.02/lb in the fourth quarter of last year. Looking forward, the recent widening of the crude oil/natural gas ratio well above historical averages will likely further boost the Alberta Advantage this year. Countering this somewhat has been the appreciation of the Canadian dollar, which has put pressure on the company’s fixed costs (largely incurred in Canadian dollars).
At March 31, 2009, NOVA’s liquidity was $323 million, down significantly from the $573 million reported at the end of last year. The company had five separate revolvers totaling $765 million in notional capacity ($740 million available based on covenant restrictions). Total availability was $182 million after borrowings of $513 million and letter of credit usage of $45 million. Cash balances were $141 million. NOVA’s largest secured revolver ($350 million) matures in June 2010. Maturities across other revolvers vary but generally range from 2010-2013. Management anticipates that all existing liquidity facilities will remain in place at closing.
Fitch’s Recovery Rating (RR) of ‘1’ on NOVA’s secured revolving credit facility and preferred notes issuance indicates outstanding recovery prospects (91%-100%) for holders of these debt issues. These issuances are secured by the net book value of petrochemical plants in Canada, including NOVA’s interest in the E1, E2 and E3 crackers in Joffre, Alberta. Note that the preferred notes share in this security on a pari passu basis. The Recovery Rating for NOVA’s senior unsecured notes and revolver of ‘4’ indicates average recovery prospects (31%-50%) for holders of these debt issues. Fitch applied a liquidation value analysis for these RRs.
NOVA’s Asset Retirement Obligation (ARO) was $20 million at year-end 2008 and consisted of expected remediation costs for facility closures. The company’s pension plans had a funding deficit of $181 million at the end of 2008, versus a deficit of $166 million the year prior. In 2009, contributions to NOVA’s defined benefit plan are expected to be $40 million-$50 million.
Nova Chemicals is a multinational producer of commodity chemicals including styrene, polystyrene, ethylene and polyethylene with approximately 2,700 full-time employees. A majority of its assets are located in Canada and the U.S. In North America, Nova is the leading producer of styrene and expandable polystyrene and the fifth largest ethylene producer. The company reports three business segments: olefins/polyolefins, performance styrenics, and the INEOS-NOVA Joint Venture. In 2008, the U.S. accounted for 45% of sales, Canada for 35%, Europe and rest of the world for 19%. Polyethylene and styrenic polymers are used in rigid and flexible packaging, containers, plastic bags, plastic pipe, electronic appliances, housing and automotive components and consumer goods. Exports to Asia are enabled in part by low-cost back-haul shipping economics from Western Canada.
Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.