NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB' Issuer Default Rating (IDR) to Sunoco, LP (SUN). In addition, Fitch has assigned a 'BB+/RR1' rating to SUN's senior secured credit facility, and a 'BB/RR4' rating to SUN's senior unsecured notes offering due 2023. The notes are being co-issued with Sunoco Finance Corp. (rated 'BB' by Fitch).
The 'BB+/RR1' rating for SUN's senior secured revolving credit facility reflects its substantial collateral coverage and outstanding recovery prospects in a distressed scenario. The one notch uplift from SUN's IDR reflects Fitch's notching criteria for issuers with IDR's in the 'BB' range. On the other hand, the rating of 'BB/RR4' for SUN's senior unsecured notes reflects Fitch's expectation that recoveries would be average in a distressed scenario.
Proceeds from SUN's inaugural senior unsecured notes offering are expected to be used to partially fund the planned drop down acquisition from Energy Transfer Partners L.P. (ETP; rated 'BBB-'; Stable Outlook) -- SUN's parent company and the owner of its general partner (GP) -- and to pay down revolver borrowings.
The Rating Outlook is Stable.
KEY RATINGS DRIVERS
PARENTAL AFFILIATION
The 'BB' rating reflects SUN's relationship with its parent, ETP. As owner of SUN's GP, ETP provides significant benefits to SUN, particularly with regard to SUN's ability to acquire and fund assets through dropdowns. These benefits are not available to standalone partnerships. Fitch believes that the affiliation with ETP helps minimize event financing and operating risks associated with dropping down ETP's inventory of retail assets. Fitch expects dropdowns to be funded with a balance of debt and equity, including units back to ETP.
GROWING SCALE
Fitch believes that SUN will benefit from increasing economies of scale as it grows through planned drop-downs from ETP. Both ETP and SUN have articulated a schedule for dropdowns over the next several years to support efficient integration efforts and more quickly realize operational efficiencies. As the store count managed by SUN continues to grow, SUN will be able to benefit from increased purchasing power, logistical support and the awareness of its top regional and national brands to create value. This growing presence should allow SUN to increase its share of a highly fragmented convenience store-fuel station market in which nearly 60% of its competitors only own one store.
LEVERAGE
Fitch's calculated debt/operating EBTIDA as of yearend 2014 was high at 8.4x reflecting the yearend drop-down of Mid-Atlantic Convenience Stores from ETP for $768 million, and the acquisition of Aloha Petroleum for $240 million. Leverage should improve as SUN executes on its business plan and as earnings from the recent acquisitions and planned dropdowns come online. Fitch's leverage forecast for 2015 of 5.6x and for 2016 of 4.9x continues to improve to below 4.2x by 2018. Leverage metrics above 5.0x on a sustained basis would likely lead to a negative ratings action.
LIQUIDITY
As of Dec. 31, 2014, SUN had $67 million in cash on its balance sheet and $555 million in available borrowing capacity under its $1.25 billion senior secured revolving credit facility. The revolver requires SUN to maintain a leverage ratio as defined in the credit agreement of not more than 5.5x, subject to an upward adjustment to 6.0x for three fiscal quarters following an acquisition whose purchase price is not less than $50 million. SUN receives pro forma EBITDA credit for acquisitions and material projects. Pro forma EBITDA credit for acquisitions and material projects is typical for MLP bank agreements. Given SUN's significant acquisitions, Fitch forecasts the partnership will have significant cushion for the leverage covenant.
As of Dec. 31, 2014, SUN's leverage as defined in the credit agreement was 4.1x. As of Dec. 31, 2014, SUN had no senior unsecured debt.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--Wholesale distribution volume growth at a five-year compound average growth rate (CAGR) of about 1.5%;
--Same-store retail distribution volume growth at a five-year CAGR of about 2%;
--Wholesale gross margins of about eight cents per gallon;
--Retail gross margins of about 25 cents per gallon;
--ETP drops down virtually all its wholesale and retail distribution assets into SUN within the next four years;
--SUN funds these drop down acquisitions with a balanced mix of debt and equity issuance.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Sustained leverage (Debt/EBITDA) below 3.5x, along with consistent operating margin improvements could result in positive rating action.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Deteriorating EBIT margins at or below 1% on a consistent basis could lead to negative rating action.
--An aggressive distribution policy that consistently resulted in a distribution coverage ratio below 1x, combined with leverage ratios durably above 5.0x could result in negative rating action.
Fitch assigns the following ratings:
Sunoco, LP
--Long-term Issuer Default rating 'BB';
--Sr. Unsecured debt 'BB/RR4';
--Sr. Secured debt 'BB+/RR1'.
Sunoco Finance Corp.
--Sr. Unsecured Debt 'BB/RR4'.
The Rating Outlook is Stable
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'2015 Outlook: Natural Gas Pipelines (Stability Despite Price Uncertainty)' (December 2014);
--'Pipelines, Midstream and MLP Stats Quarterly - Third Quarter 2014' (December 2014);
--'MLP End Game (Common Goals - Divergent Strategies) (November 2014);
--'What Investors Want to Know: Pipelines, Midstream and MLPs' (October 2014);
--'Midstream Spending Significantly Rising for MLPs and C-Corps' (August 2014);
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014)';
--'Rating Pipelines, Midstream and MLPs - Sector Credit Factors' (January 2014).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981747
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