DBRS Places Superior Plus Ratings Under Review with Negative Implications

DBRS Limited (DBRS) has today placed the BB (high) Issuer Rating and Senior Secured Notes rating of Superior Plus LP (Superior Plus or the Company) and the BB (low) Senior Unsecured Debentures rating Under Review with Negative Implications, following the Company’s announcement of an agreement to purchase all equity interests in Canexus Corporation (Canexus). DBRS understands that Superior Plus plans to issue new common shares to Canexus’ shareholders in exchange for Canexus’s shares and that the Company intends to refinance all existing Canexus’s borrowings and convertible debt, amounting to $661 million as at June 30, 2015, with possible equity issuance of up to $150 million, with the remainder with new debt issuances. The proposed acquisition is subject to approval by Canexus’s shareholders and other regulatory approvals, and Superior Plus expects the transaction to close in the first half of 2016.

The rating actions reflect that, if the transaction proceeds as planned, Superior Plus’ debt coverage ratios and the resulting financial profile, on a pro forma basis, would become weak for the current ratings. While Superior Plus’s planned use of equity to fund the acquisition is positive, DBRS estimates that the impact of an additional $740 million of Canexus’s adjusted debt (including operating-lease adjusted debt of approximately $180 million) would cause the Company’s adjusted debt-to-EBITDA to rise to 4.5 times (x) from the current level of 4.0x and the adjusted cash flow-to-debt to fall to 17% from the current level of 19%. These pro forma financial metrics are weak for the rating.

DBRS understands that the Company intends to reduce its financial leverage through the combined free cash flow to within its internal unadjusted debt-to-EBITDA target of 3.0x to 3.5x within 12 months to 18 months after the closing of the transaction (from the Company’s estimate of 4.2x on a pro forma basis at transaction close) and recognizes the Company’s deleveraging effort since the current management has been in place since 2011. However, the Company could face challenges in integrating the acquired operation into its Specialty Chemicals division, with the current weak demand in chloralkali products (especially in hydrochloric acids, which are used by the currently challenged oil and gas extraction operations), while at the same time, continuing to focus on its ongoing cost and service improvement efforts in its Energy Services (ES) and Construction Products Distribution (CPD) divisions. DBRS recognizes that issues related to these challenges and the continued exposures to factors beyond the Company’s control (including weather and winter temperature for the ES business and recovery of North American housing starts for CPD) could potentially delay Superior Plus’s future efforts to reduce its leverage to the targeted range.

Canexus is manufacturer of sodium chlorate and chloralkali products (essentially the same products produced by Superior Plus’s Specialty Chemicals division), with three operating facilities in Canada (with total capacity of 392,000 metric tonnes per year) and two operating facilities in Brazil. Upon completion of the acquisition and business integration, Superior Plus expects to benefit from Canexus’ relatively low electricity costs (with operations in regions where power is sourced mainly from low-cost hydroelectric generation), improved market position and geographic coverage in the niche specialty chemical markets, better proximity to clients, lower transportation costs and expected synergy through corporate overhead reduction. Superior Plus expects Canexus to be earnings and cash flow accretive in its first full year following the acquisition and expects to reduce its unadjusted debt-to-EBITDA to a level within its internal target of 3.0x to 3.5x within 12 months to 18 months after the closing of the acquisition.

DBRS will review the progress of the acquisition proposal and financing arrangement as more details become available, while continuing to review Superior’s operating results in its core businesses and overall financial metrics. Upon the completion of the acquisition, DBRS could consider downgrading Superior Plus in the event that weaker-than-expected operating results and/or higher-than-expected borrowing cause the Company’s financial metrics to be materially weaker than the aforementioned pro forma level. Alternatively, DBRS could confirm the rating but change the trend to Negative and monitor the progress in business integration and leverage reduction in the following 12 months to 18 months. Smooth integration and substantial progress toward Superior Plus’s leverage target could eventually lead to restoring the ratings’ trend to Stable. DBRS could also confirm the rating in the event that the acquisition does not materialize as planned.

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

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

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.

The applicable methodologies are Rating Companies in the Industrial Products Industry and Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.