CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed NOVA Chemicals Corporation's (NOVA) Long-Term Issuer Default Rating (IDR) at 'BBB-', its senior secured credit facility and senior unsecured notes at 'BBB-'. The Rating Outlook is Stable. This rating action affects approximately $1.6 billion of debt and commitments. A full list of ratings is provided at the end of this release.
KEY RATING DRIVERS
LOW COST POSITION
The ratings reflect NOVA's position as a low-cost ethylene producer. The company benefits from low-cost feedstock at both its Joffre, Alberta and Corunna, Ontario sites after converting the Corunna cracker to accept light feedstock and should benefit further from a conversion to 100% ethane. The company has further expanded ethane sourcing options including sourcing directly from the Williston Basin, and off-gas from oil sands projects. In addition, NOVA's Joffre site is integrated with the AEGS pipeline system and its Corunna site has pipeline access to the Marcellus Basin.
CONSERVATIVE FINANCIAL MANAGEMENT
Fitch believes NOVA's financial management is conservative. NOVA has reduced its debt balances since it was acquired by IPIC PJSC ('AA'/Stable) in 2009 from approximately $1.8 billion to $1 billion for the period ended March 31, 2016. Leverage metrics are currently strong, and though leverage is expected to increase with EBITDA declines expected in 2017, Fitch does not project the need for NOVA to add a material amount of debt even in the expansion phase, as cash flow from operations is expected to remain robust. Additionally, while distributions to IPIC have been elevated recently, Fitch expects future distributions to be moderate and in line with the financial performance of the company.
SUBSTANTIAL CAPEX SPENDING
The company is in the midst of executing its NOVA 2020 plan. NOVA has completed its transition of the Corunna cracker to all light feedstock and is in the process of building another polyethylene reactor at Joffre, which is expected to start-up in fourth quarter 2016 (4Q16), adding approximately 1 billion pounds of new polyethylene capacity. In addition, as part of NOVA 2020, funding has been approved to convert the Corunna cracker to allow it to utilize 100% ethane.
LIMITED PRODUCT DIVERSIFICATION
The ratings are constrained by the company's lack of product diversification and the bulk of NOVA's products being fairly commoditized in nature. NOVA produces a variety of polyethylene products (HDPE, LDPE, and LLDPE) but not a significant amount of other ethylene derivatives currently. NOVA's competitors with other ethylene chains can direct ethylene production to the highest margin intermediate- or end-product, allowing for increased production flexibility and export ability to capture higher margins.
SIGNIFICANT OLEFIN SUPPLY EXPANSIONS LIKELY TO PRESSURE PRICES
The advantaged cost position for North American (NA) ethylene production based on NGL feedstock has spurred capacity expansion activity, with large amounts of additional NA ethylene production capacity slated to come online in the 2016-2018 timeframe, significantly pressuring NA ethylene prices until additional derivative capacity is constructed, and global demand increases. Though still mostly on track, Fitch expects at least some of these pre-construction projects to be delayed or cancelled due to reduced economics, leaving companies such as NOVA, which expects to bring polyethylene capacity online earlier in this timeframe, to benefit from a return to more rational margins. Fitch also expects that NA ethylene producers as a whole will continue to be low cost due to the feedstock advantages associated with shale production.
CYCLICALITY OF COMMODITY CHEMICALS
Fitch acknowledges the cyclical nature of commodity chemicals. NOVA's revenue is driven by volatile ethylene product prices, which have declined significantly in the past two years with the flattening of the cracking cost curve and are subject to sticky, long-term capacity changes while costs are linked to fluctuating regional natural gas prices. NOVA's derivative capacity additions and its diversification of feedstock supplies should reduce earnings volatility somewhat, but will likely be more than offset by overall industry volatility in the near term. Fitch expects the company to maintain a conservative financial policy in light of forecasted weakening market fundamentals.
NOVA should have sufficient liquidity to fund working capital and capital expenditure requirements and to withstand less favorable industry conditions. Fitch projects negative FCF after distributions for 2016-2018, but cash balances should enable the company to fund capex expansions without the need for significant additional liquidity. If cash flow generation falls short of expectations, Fitch expects a combination of distributions and capex to be delayed. The company has a light maturity schedule with no large principal payments due until 2023. NOVA has two notes outstanding, $500 million due in 2023 and $500 million due 2025.
NOVA's main $550 million senior secured credit facility, which matures in December 2020, is governed by a senior debt-to-cash-flow covenant of maximum 3.0x and a net debt-to-capitalization covenant of maximum 60%. NOVA was in compliance with these covenants at March 31, 2016. Fitch expects the company to remain in compliance throughout the lifetime of the facility. The facility is secured by NOVA's interest in assets in Canada, including a fixed and floating lien on certain real property and a security interest in personal property.
-- Volumes at management's guidance with capacity expansions coming online on time;
-- Ethane and ethylene prices in line with industry expectations;
-- Distributions are reduced in line with cash flow generation falling short of expectations.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Material increase in size, scale, or diversification while maintaining strong credit metrics;
--Hard credit support from IPIC.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--A sustained return of adverse economic conditions and excess capacity for the chemical industry leading to weak sales and profits;
--A sharp erosion of the company's feedstock advantage relative to crackers using heavier feeds, resulting in higher debt-funding during the capex build-out period;
--Expectations for prolonged meaningful negative FCF leading to debt levels where leverage is sustained above 2.5x on a total debt-to-EBITDA basis through the cycle;
--Substantially increased distributions to IPIC funded by debt.
Fitch affirms NOVA as follows:
--Long-Term IDR at 'BBB-';
--Senior secured revolving credit facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is Stable.
SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS
Fitch has made no material adjustments that are not disclosed within the company's financial statements released to its debt investors.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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