DBRS Downgrades Superior Plus LP to BB (high) and BB (low), Changes Trends to Stable

DBRS has today downgraded the Senior Secured Notes and Senior Unsecured Debentures ratings of Superior Plus LP (Superior) to BB (high) and BB (low), respectively, from BBB (low) and BB (high), respectively, with both trends changed to Stable from Negative. Pursuant to DBRS’s leveraged finance rating methodology, recovery ratings of RR3 and RR6, respectively, have been assigned to the above-noted securities. The two-notch downgrade and RR6 recovery rating on the Senior Unsecured Debentures incorporate the large amount of Senior Secured Notes that rank in priority to the Senior Unsecured Debentures. Finally, DBRS has assigned an Issuer Rating of BB (high) with a Stable trend to Superior. Superior is a 99.9% owned subsidiary of Superior Plus Corporation (the Corporation), which converted from an income fund at year-end 2008.

The rating downgrades reflect DBRS’s review of the Corporation’s Q2 2011 financial results, its 2011 public financial outlook and its medium-term plans in the context of ongoing economic weakness in its key North American markets. Based on its review and year-to-date results, DBRS expects that the moderate pace of improvement in credit metrics to date in 2011 will result in a longer transition period to more conservative financial metrics than previously anticipated. Consequently, DBRS no longer expects Superior’s financial profile to be consistent with an investment-grade rating over the near to medium term in the absence of substantial corrective measures. DBRS believes that Superior’s business risk profile remains relatively unchanged compared with prior years, although with modestly higher exposure to seasonal weather conditions following the 2009-2010 acquisitions noted below. The Stable trends assigned reflect DBRS expectation of moderate improvement in credit metrics going forward.

In its August 31, 2010, press release, DBRS stated that the rating confirmations on that date (although the trends were changed to Negative from Stable) reflected “DBRS’s expectation of a gradual recovery of the Corporation’s credit metrics to relatively strong 2008 levels by the end of 2011 in order to maintain the current ratings.” This was supported by expected contributions from the various acquisitions (totalling $468.4 million) completed between late Q3 2009 and early Q1 2010 and the ramp-up of activity at the Port Edwards chloralkali facility, which was converted to membrane technology over a two-year period ending in Q4 2009, for a total cost of $157.7 million. The Corporation raised significant financing, roughly one-third each of common equity, senior debt and convertible subordinated debentures, between year-end 2007 and June 30, 2010. Consequently, DBRS calculated pro forma credit metrics that included the estimated impact of these transactions as if they occurred at the beginning of the respective periods.

On a pro forma DBRS-adjusted basis, the Corporation’s total debt-to-EBITDA ratio improved from 6.2 times at year-end 2010 to 5.5 times for the 12 months ending June 30, 2011 (12M June 2011), but remained above the 5.3 times level in 12M June 2010 and well above the 3.4 times level achieved at year-end 2008. Concurrently, its pro forma DBRS-adjusted senior debt-to-EBITDA ratio (which includes the senior secured notes, the bank facility, amounts previously due under the off-balance sheet accounts receivable securitization program (terminated in June 2011) and the senior unsecured debentures) improved from 3.2 times at year-end 2010 to 2.9 times in 12M June 2011, but was only marginally stronger than the 3.1 times level in 12M June 2010 and well above the 2.4 times level achieved at year-end 2008. The Corporation’s pro forma DBRS-adjusted senior secured debt-to-EBITDA ratio (which excludes the senior unsecured debentures), improved to 2.3 times in 12M June 2011 from 2.4 times at year-end 2010 and in 12M June 2010, but remained well above the 1.8 times level achieved at year-end 2009. Superior is required, under its credit facility, to restrict its senior secured debt-to-EBITDA ratio to not more than 3.0 times. (Note that the convertible subordinated debentures, upon which the Corporation may elect to pay principal upon maturity or redemption by issuing shares to the debenture holders, are treated as 100% debt for “total debt” ratios and are excluded from “senior debt” ratios and financial covenant calculations.) Finally, the pro forma DBRS-adjusted cash flow-to-total debt ratio improved from 11% at year-end 2010 to 13% in 12M June 2011, but was marginally weaker than the 14% level in 12M June 2010 and remained far below the 23% level achieved at year-end 2008. The latest ratios remain outside the acceptable range for Superior’s previous ratings.

The deterioration in the Corporation’s key credit metrics between year-end 2008 and year-end 2010 was mainly due to: (1) weaker earnings and cash flow as a result of ongoing economic weakness and the negative impact of warmer-than-expected weather in the 2009-2010 winter; (2) higher debt levels resulting from partial debt financing for the various acquisitions and growth capital expenditures noted above; and (3) lower-than-expected earnings from the various acquisitions, largely related to the factors cited in (1) above. Modest improvement in 12M June 2011 was mainly due to improved results in its Energy Services segment, lower cash dividends and improved accounts receivable collections at its Superior Propane business unit.

The above factors also negatively affected the Corporation’s DBRS-adjusted dividend payout ratio, which rose to 123% in 2010 from 85% in 2009 and 74% in 2008, leading to a 26% dividend reduction in Q1 2011 and a 93% ratio for 12M June 2011 (approximately 80% pro forma). Similarly, the DBRS-adjusted total EBITDA interest coverage ratio declined to 3.0 times in 2010 from 4.5 times in 2009 and 6.3 times in 2008 before recovering slightly to 3.1 times in 12M June 2011. Superior restarted its dividend re-investment program (DRIP) during Q2 2010, commencing with the payment of its May 2010 dividend and reduced its dividend from $0.135 per share, or $1.62 per share annualized, to $0.10 per share, or $1.20 per share annualized, in Q1 2011.

Superior’s liquidity remains reasonable, with no major maturities until year-end 2012, when the Corporation has $175 million of 5.75% convertible subordinated debentures maturing, although it may elect to pay principal upon maturity or redemption by issuing shares to the holders. At June 30, 2011, Superior had credit lines totalling $615 million ($337.4 million of borrowings and $32.2 million of letters of credit outstanding), expandable to $750 million, maturing on June 27, 2014.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Companies in the Industrial Products Industry and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.