DBRS Places Newalta Corporation Under Review with Developing Implications

DBRS Limited (DBRS) has today placed the BB Issuer Rating and the BB Unsecured Notes rating of Newalta Corporation (Newalta or the Company) Under Review with Developing Implications following the Company’s announcement on December 23, 2014, of an agreement to sell its Industrial Division (Industrial) for $300 million in cash to Birch Hill Equity Partners, which also agrees to assume the associated asset retirement obligation. The Company intends to use the proceeds to pay down debt and support investment in organic growth opportunities. The transaction is subject to satisfaction of customary closing conditions as well as regulated approvals, and is expected to close in the first quarter of 2015.

DBRS notes that the net impact of the divestment and the use of proceeds to reduce the draw on the credit facility and to fund organic growth opportunities are modestly positive to the overall risk profile of the Company.

The divestment would modestly weaken Newalta’s business risk profile, as it would cause a reduction in business and geographical diversity, and an increased concentration in the volatile oil and gas industry, partly offset by a lower profitability and lesser growth potential at Industrial. However, the sale would greatly strengthen the Company’s financial flexibility. The Company has consistently incurred a deficit in free cash flow the last few years mostly because of rising capital expenditures to support growth investments. The sale proceeds would allow the Company to repay the entire draw on it credit facility, lowering financial leverage immediately after closing as well as helping fund future capital spending. Despite losing about 43% of revenue and 23% of gross profit, DBRS estimates that all key financial risk metrics as at September 30, 2014, on a pro forma basis, would strengthen modestly.

DBRS expects to revisit the ratings of Newalta when the transaction is completed as announced and will review the Company’s revised strategic plan and financial outlook in view of the current depressed conditions of the oil and gas industry. However, the Company has also indicated in its press release that it will continue to actively pursue acquisitions to augment organic growth. DBRS will treat any acquisition as an event and assess the Company’s risk profile relative to its rating at that time.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Services Industry and DBRS Criteria: DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.