DBRS Confirms Superior Plus LP’s Ratings with Stable Trend Following Termination of Canexus Acquisition

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Secured Notes (the Notes) rating of Superior Plus LP (SP-LP or the Company) at BB (high) as well as its Senior Unsecured Debenture rating at BB (low). DBRS has also lowered the recovery rating for the Senior Secured Notes to RR3 from RR2, although the action does not result in any change in the rating on the Notes. All trends are Stable. The ratings are removed from Under Review with Negative Implications, placed on October 6, 2015. The publicly listed SP Corporation Limited (SP-Corp) has no operating business other than its ownership of SP-LP and relies solely on the Company’s business cash flows to support all consolidated debt. As such, DBRS continues to evaluate SP-Corp’s consolidated financial metrics and liquidity in its assessment of SP-LP’s financial risk.

The rating actions follow SP-Corp’s announcement to terminate the arrangement agreement to acquire all equity interests in Canexus Corporation (Canexus). With the termination of the proposed acquisition, SP-Corp’s financial metrics are not expected to further weaken as a result of the proposed assumption of Canexus debt to levels that DBRS considered to be weak for the ratings. DBRS also expects SP-Corp to maintain its financial metrics in line with its stated unadjusted debt-to-EBITDA target range of 3.0 times (x) to 3.5x (3.4x for last 12 months (LTM) ended March 31, 2016).

The Stable trends on the ratings reflect DBRS’s view that SP-LP’s business risk profile has remained stable, notwithstanding specific demand-side challenges. The Company’s continued focus on efficiency improvement as well as its leading market positions in propane distribution under its Energy Services (ES) division and in Specialty Chemicals (SC) production remain supportive of its business risk profile. Partly offsetting these strengths are (1) slow demand growth potential in its businesses and (2) exposure to external factors beyond the Company’s control (winter temperatures and product prices in ES, input costs and pulp mill production in SC and housing markets in Construction Products Distribution (CPD).

The Company’s financial performances in 2015 and Q1 2016 were mixed. Benefits from lower propane prices in ES were offset by lower volume caused by mild winter temperatures and sluggish oil and gas (O&G)-related industrial activities. SC’s results were adversely affected by weaker sodium chlorate volume caused by certain pulp mill closures and by depressed prices of hydrochloric acids resulting from a weak O&G sector and export demand. Instead, CPD had a good year, supported by recovering housing markets in the United States and continued cost-reduction efforts. Despite the challenges, SP-Corp continued to reduce debt, causing debt metrics to remain steady despite lower EBITDA and cash flows. Adjusted cash flow-to-debt for the LTM ended March 31, 2016, was 19% and adjusted debt-to-EBITDA was 3.9x, both virtually unchanged from their respective levels in 2014 and consistent with the current ratings.

DBRS has noted SP-Corp’s announcement on July 5, 2016, of a definitive agreement to sell its CPD business to Foundation Building Materials, LLC for USD 325 million (CPD sale), which is expected to close before the end of 2016, subject to regulatory approval. SP-Corp expects to use proceeds from the CPD sale to reduce debt as well as to support expansion in ES and SC, with the Company’s expectation that its unadjusted debt-to-EBITDA would range between 2.0x and 2.5x. Although the range could reflect a financial risk profile that is stronger than the current ratings, DBRS has not factored this event into the rating and will assess the impact of the CPD sale when there is more certainty regarding the timing of the sale, eventual use of proceeds as well as implications for post-sale EBITDA and cash flows.

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.

The applicable methodologies are DBRS Criteria: Financial Ratio Definitions and Accounting Adjustments Non-Financial Companies, DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, Rating Companies in the Industrial Products Industry, Rating Companies in the Merchandising Industry and Rating Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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