DBRS Comments on Newalta Corporation’s $50 million Equity Raise

DBRS Limited (DBRS) today notes that Newalta Corporation (Newalta or the Company; rated B with a Negative trend by DBRS) announced on March 31, 2016, that it had entered into two separate agreements to sell equity for gross proceeds of $50 million. The funds will primarily be used for debt reduction.

As DBRS noted on March 4, 2016, Newalta’s liquidity position is stressed and this injection is helpful and timely in that respect. The Company has indicated that availability under its $160 million secured credit facility will increase to $129 million from $82 million as at 29 February 2016. Despite the recent somewhat favourable movements in benchmark oil prices, which are currently above Newalta’s relatively conservative USD 25 to 35 per barrel oil price assumption range for 2016, DBRS continues to expect a free cash flow deficit this year. This adds to the importance of the equity capital raise, especially given the expectation of a lagged impact on client activity responses from any sustained oil price increases. Furthermore, the debt reduction (and associated lower interest expenses) makes it less likely that the Company will need to seek further covenant accommodation from its lenders in the immediate near term.

On a pro forma basis, however, Newalta’s financial profile looking forward remains stretched. While the incorporation of the lower debt and interest noticeably improves projected key metrics, they remain weak for the current rating. The market outlook remains unfavourable overall and further cost-cutting initiatives beyond the significant actions taken thus far will be more difficult to achieve. As a result, while the equity raise offers an important improvement to the Company’s liquidity position, it does not have any impact on the current rating or trend.

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

The applicable methodologies are Rating Companies in the Services Industry (June 2015) and DBRS Criteria: DBRS Recovery Ratings for Non-Investment Grade Corporate Issues (Mar 2016), which can be found on our website under Methodologies.

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