CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded NOVA Chemicals Corporation's (NOVA) Issuer Default Rating (IDR) to 'BBB-', its senior unsecured credit facility and senior unsecured notes at 'BBB-', and affirmed the company's secured credit facility at 'BBB-'. The Rating Outlook is revised to Stable from Positive.
This rating action affects approximately $1.7 billion of debt and commitments. A full list of ratings is provided at the end of this release.
KEY RATING DRIVERS
The ratings reflect NOVA's position as a low cost ethylene producer. NOVA benefits from low cost feedstock at both its Joffre, Alberta and Corunna, Ontario sites after converting the Corunna cracker to accept light feedstock. The company is also sourcing ethane directly from the Williston (for Joffre) and Marcellus (for Corunna) basins. EBITDA margins have increased to above 20% from levels below 10% in 2009.
Fitch believes NOVA's financial management is conservative. NOVA has reduced its debt balances since it was acquired by IPIC PJSC ('AA'/Outlook Stable) in 2009. Debt has declined from $1.8 billion at the end of 2009 to $1 billion for the period ended March 31, 2015. Leverage metrics are strong as well, measuring just below 1.0x on a total debt to operating EBITDA basis at March 31, 2015. While distributions to IPIC and capital expenditures have been growing, Fitch expects future distributions to be moderate and in line with the financial performance of the company and capex to decline significantly after the reactor currently under construction is completed in 2016.
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 be completed in mid-2016 and start-up in Q4 2016, adding approximately 1 billion pounds of new polyethylene capacity. Capital spending will peak in 2015 and 2016 for these projects, but Fitch expects additional borrowings will not be necessary given strong cash generation and large cash balances.
The ratings are constrained by the company's lack of product diversification. NOVA produces a variety of polyethylene products (HDPE, LDPE, and LLDPE) and grades but no other ethylene derivatives. NOVA's competitors with other ethylene chains can direct ethylene production to the highest margin intermediate or end product. NOVA's products are also commoditized in nature, with a number of producers manufacturing similar products.
Fitch acknowledges the cyclical nature of commodity chemicals. NOVA is dependent upon plastic demand for revenue growth. Plastics demand generally tracks global economic growth. With the decline in naphtha prices, prices of ethylene and its derivatives have decreased also, as the highest cost marginal producers are naphtha-based, mostly in Europe and China. Fitch expects some margin contraction for light feedstock producers in the near term, but a material cost advantage is expected to remain in the long run.
The advantaged cost position for North American ethylene production has spurred capacity expansion activity, with large amounts of North American ethylene production capacity comping online by 2019. However, Fitch expects at least some of these pre-construction projects to be cancelled, leaving companies such as NOVA that brought capacity online earlier to benefit from a return to more rational margins. Fitch also expects that North American ethylene producers as a whole will continue to be low cost due to the feedstock advantages associated with the shale revolution.
NOVA has robust liquidity that should enable the company to fund working capital and capital expenditure requirements and to withstand less favorable industry conditions. At March 31, 2015, NOVA had liquidity of $1.4 billion, consisting of $763 million cash on-hand and $608 million available under its syndicated and bilateral credit facilities. Fitch projects marginal negative FCF after distributions in 2015 and 2016, but cash balances should enable the company to fund the use of cash without significant additional borrowings.
NOVA's main $550 million senior secured credit facility, which matures in December 2018, is governed by a senior debt-to-cash-flow covenant of max 3.0x and a debt-to- capitalization covenant of max 60%. NOVA was in compliance with these covenants at March 31, 2015. 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 charge on certain real property and a security interest in personal property.
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.
--Capital spending peaks in 2015 and 2016;
--Cash balances and internal cash generation sufficient to fund capital spending in 2015 and 2016;
--Volume increases when capacity at Joffre comes online in Q4 2016.
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 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 takes the following rating actions on NOVA:
--Long-term IDR upgraded to 'BBB-' from 'BB+';
--Senior unsecured revolving credit facilities upgraded to 'BBB-' from 'BB+';
--Senior unsecured notes upgraded to 'BBB-' from 'BB+';
--Senior secured revolving credit facility at 'BBB-'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)