Fitch Ratings has assigned a 'BBB-' rating to Otter Tail Corporation's (OTTR) issuance of $100 million 9.00% senior notes due Dec. 15, 2016. The rating is the same as Fitch's Issuer Default Rating (IDR) of 'BBB-' for OTTR. The new notes will rank equally with the company's existing senior unsecured obligations. The proceeds of the issuance will be used to repay amounts outstanding under OTTR's revolving credit facility and for general corporate purposes. The Rating Outlook is Stable.
The new senior notes' debt agreement includes a 'change of control triggering event' feature under which, upon a change of control, the company would be required to make an offer to repurchase the notes for 101% of the aggregate principal amount of the notes repurchased plus accrued and unpaid interest.
Fitch established ratings on OTTR on June 26, 2009, following the company's announcement of a corporate reorganization in which OTTR became the parent holding company of Otter Tail Power (OTP; IDR of 'BBB' by Fitch), its utility subsidiary. OTTR's business portfolio also includes a diverse set of highly cyclical industrial businesses classified into five segments: plastics, manufacturing, health services, food ingredient processing, and other diverse business operations.
Fitch's current rating and Stable Outlook reflect adequate liquidity, a low level of parent debt leverage, as well as the relatively stable base provided by the cash flows and moderate level of debt leverage of OTP, which benefits from supportive regulatory mechanisms in its three-state area of Minnesota, North and South Dakota, including tracker mechanisms to recover some operating costs from consumers.
For the first nine months ended Sept. 30, 2009, the non-utility businesses contributed 70% of OTTR's total operating revenues and 38% of total operating EBITDA. In Fitch's opinion, OTTR's non-utility businesses' operating margins, particularly the plastics and manufacturing segments, have been severely affected by the recession and the sharp decline in industrial demand. Weakened margins are partly offset by OTTR's food ingredient processing segment which has shown some resilience to the economic downturn due to higher volume and pricing. In Fitch's view, the stress on OTTR's credit metrics evident during 2009 will continue in 2010, assuming a very slow economic recovery affecting the industrial components of the business portfolio and continuing weakness in electricity demand affecting OTP. Maintaining access to liquidity and stabilization of debt leverage will be important factors in keeping OTTR's rating within its current category. For the latest 12 months ended Sept. 30, 2009, OTTR's EBITDA-to-interest ratio was 5.2 times (x) and debt-to-EBITDA ratio was 4.0x, consistent with OTTR's current rating category.
OTTR's financial results and cash flows have been bolstered by income tax benefits and production tax credits related to OTP's capital investments in wind projects.
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