Fitch Ratings has upgraded NOVA Chemicals Corporation's (NOVA) Issuer Default Rating (IDR) to 'BB-' from 'B+' and its senior unsecured debt ratings to 'BB-' from 'B+/RR4'. The ratings for the senior secured bank credit facility have been affirmed at 'BB+'. The Ratings Outlook is revised to Positive from Stable. A full rating list is shown below.
The upgrade is based on NOVA's strong operating performance over the past several quarters and its significantly improved credit profile following its acquisition by Abu Dhabi-based International Petroleum Investment Company (IPIC; Fitch IDR of 'AA/F1+') in 2009.
NOVA benefits from robust demand and tight supply in its core Olefins/Polyolefins segment, which mainly produces ethylene and polyethylene. The resulting favorable pricing environment coupled with low costs for light, natural gas-based feedstock enable high operating profits and margins. In the last 12 months (LTM) to March 31, 2011, NOVA had operating EBITDA of approximately $1 billion, corresponding to a margin of 20.8%, based on $4.8 billion revenues from continued operations.
The company's performance resulted in significant LTM free cash flow of $421 million, based on $580 million cash flow from operations and $159 million capital expenditures. Fitch expects NOVA to continue to generate meaningful free cash flow in 2011.
In 2010, NOVA repaid its C$250 million notes. Repayment and stronger operating performance reduced the company's gross balance sheet debt to EBITDA leverage to 1.7 times (x). Gross balance sheet debt of $1.7 billion includes $166 million outstanding balance under the company's accounts receivables securitization program, which the company now reports on the balance sheet.
The strengthening of the company's credit profile partially mitigates the key ratings constraints, the price volatility and the demand and supply cyclicality of commodity chemicals. Prices for the company's commodity products sold to third party customers (ethylene, polyethylene, polystyrene and by-products) are volatile as they follow the cyclicality of the industry, which is not only influenced by the economic demand cycle but also by the industry's supply dynamics.
Typically, capacity additions come in very sizeable increments and are often executed by multiple industry participants at the same time. After these additions have come online, it often takes multiple years to absorb the resulting supply glut. Based on current announcements, North American ethylene production could see up to 4.5 million metric tons of additional capacity coming online by 2017. If fully completed, these additions would correspond to approximately 17% of today's capacity and would have the potential to reverse the currently favorable pricing environment.
Another rating constraint is the underperformance of the company's Performance Styrenics division, which had only $81 million revenues and $3 million operating profit in the first quarter of 2011. The lack of critical mass became even more pronounced after the divestiture of NOVA's stake in the INEOS NOVA joint venture, which mainly produced styrene and polystyrene. NOVA completed the sale of the joint venture in the first quarter of 2011 and received EUR47 million, which is still subject to certain pension liability adjustments. NOVA continues to evaluate and to explore strategic options for the Performance Styrenics business unit.
NOVA has sizeable short-term debt maturities of $567 million, including the company's $400 million senior unsecured notes due 2012 and outstanding balances under the accounts receivables securitization program also due 2012. Medium-term major maturities are the $400 million senior unsecured notes due 2013. Long-term maturities include the $350 million notes due 2016, $350 million notes due 2019 and $100 million notes due 2025. Fitch expects NOVA to opportunistically address the short-term and the 2013 maturities either by refinancing or repaying the notes with cash on-hand.
The Positive Outlook is based on Fitch's expectation that the favorable ethylene and polyethylene industry dynamics in North America will remain in place over the next several quarters. Costs for light feedstock are expected to remain low and, despite the announced capacity additions, supply should remain tight. Fitch expects that NOVA will continue to generate meaningful profits and cash flows over these quarters as the announced capacity additions will come online only gradually and over an extended period of time.
NOVA has robust liquidity that will enable the company to fund working capital and capital expenditure requirements and to withstand less favorable industry conditions, if a reversal of the positive dynamics were to occur. At March 31, 2011, NOVA had liquidity of $958 million, consisting of $382 million cash on-hand and $576 million available under its syndicated and bilateral credit facilities.
NOVA's main $425 million senior secured credit facility, which matures in November 2013, is governed by a senior-debt-to-cash-flow covenant of maximum 3x and a debt-to-capitalization covenant of maximum 60%. NOVA was in compliance with these covenants at March 31, 2011. Fitch expects the company to remain in compliance throughout the lifetime of the facility. The facility is secured by the net book value of assets in Canada, including NOVA's interest in the Joffre, Alberta chemical complex and the Corunna, Ontario facility. The value of the collateral justifies the two notches rating differential over the IDR and the senior unsecured debt.
In addition, NOVA has $170 million senior unsecured bilateral revolving credit facilities, which are not governed by the financial covenants described above. Of these facilities, $30 million expires in September 2011, $40 million in September 2013 and $100 million in September 2015. Additional liquidity comes from the company's $200 million A/R securitization program, which is governed by the same set of financial covenants as the $425 million secured facility, and a $60 million bilateral letter of credit facility.
The Positive Outlook also incorporates potential upside from a series of agreements and memorandums of understanding with energy and pipeline companies to enhance the availability of cost-competitive light feedstock at NOVA's production facilities. In fiscal 2010, NOVA ran its main Joffre, Alberta production complex below nameplate capacity due to limited availability of ethane, which was derived from natural gas flow to the U.S. from Canada. Alternative supply from sources ranging from North Dakota to Canadian oil sand upgrade facilities for the Joffre, Alberta complex and to the Marcellus Shale Basin for the Corunna, Ontario facility, will come online beginning in 2012. The anticipated incremental supply of light feedstock will allow NOVA to operate its facilities at full capacity during periods of buoyant demand for its olefins and polyolefins products.
Catalysts for an upgrade would be strong operating profits and cash flows over the next several quarters with proceeds used to further reduce the company's leverage.
Catalysts for a Stable Outlook or Negative rating action would be a deterioration of the supply/demand balance, particularly against the backdrop of additional capacity coming online in North America, or a return to recessionary economic concessions which would reverse the company's recent operating and financial performance.
Fitch upgrades the following ratings for NOVA:
--Long-term IDR to 'BB-' from 'B+';
--Senior unsecured revolving credit facilities to 'BB-' from 'B+/RR4';
--Senior unsecured notes and debentures to 'BB-' from 'B+/RR4'.
The following rating has been affirmed:
--Senior secured revolving credit facility at 'BB+'.
The Rating Outlook is Positive.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' Aug. 16, 2010;
--'Rating Chemicals Companies' May 13, 2010;
--'Liquids-Rich Shale Boom - A Tailwind for North American Chemicals' Apr. 18, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Rating Chemical Companies Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510626
Liquids-Rich Shale Boom -- A Tailwind for North American Chemicals
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=619445
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