DBRS Provides an Update on Newalta Corporation’s Credit Profile

DBRS Limited (DBRS) has today provided an update on Newalta Corporation’s (Newalta or the Company) credit profile, following the downgrade of the Company’s Issuer Rating to B and its Unsecured Notes rating to CCC (high) on March 4, 2016, amid very challenging demand conditions brought about by a rapid decline in oil prices that caused material deterioration in Newalta’s credit metrics and liquidity. The Negative trend of the rating reflects DBRS’s view that cash burn at a faster pace than expected and/or further disappointments in operating results could lead to additional negative rating actions, as expressed in its earlier press release.

Operating conditions remain challenging, as reflected in Newalta’s recently released Q2 2016 results. Although West Texas Intermediate crude oil prices moderately improved to within the $40 to $50 per barrel range in Q2 2016 (from approximately $30 to $40 per barrel in Q1 2016), production and drilling activities in the oil patch have been slow to recover and waste management volume has remained weak.

Nevertheless, Newalta managed to modestly improve results and reduce cash burn in Q2 2016, enabled by cost rationalization efforts and moderately alleviated liquidity pressure with proceeds of a completed equity issue. Cost rationalization efforts in the past year have helped the Company generate a modest EBITDA of $2.3 million in Q2 2016 compared with EBITDA breakeven in Q1 2016. The EBITDA improvement could have been more meaningful if not for the two material one-off impacts ($4.5 million resulting from business interruption related to the Fort McMurray wildfire in May 2016, and $3.6 million due to restructuring charges related to cost rationalization).

With the gradual sequential earnings improvement and substantially reduced capital expenditure (capex) to $2.6 million (from $8.5 million in Q1 2016), the Company’s cash burn and liquidity situation has also become less acute. Total cash burn from operating and investment activities was reduced to $7.7 million in Q2 2016, from $16.4 million in the preceding quarter, which was more than adequately covered by the $51.4 million proceeds from equity issuance in Q2 2016, and allowed Newalta to reduce its debt by $45.6 million during the quarter. As at June 30, 2016, the Company had a cash balance of $1.7 million and its liquidity is further supported by its $160 million secured credit facility maturing July 2018, of which approximately $100 million remains undrawn and available. The amount should be adequate to cover an estimated cash burn of approximately $20 million in the second half of 2016.

Looking ahead to the remainder of the year, operating conditions are likely to remain challenging. Newalta’s rolling 12-month EBITDA is likely to weaken further, despite expectation of continued improvement, as earnings in the comparatively stronger corresponding quarters in 2015 will become excluded. DBRS maintains its view that the Company remains exposed to challenges beyond its control and that continued cost discipline and cash conservation will be needed to avoid further deterioration in its ratings. DBRS also expects that meaningful volume recovery could occur only after a more sustained period of oil prices at or above the current levels.

The Negative trend on Newalta’s ratings continues to reflect the stretched financial profile, the challenging market outlook, the increasing difficulty that would be associated with any further cost cutting and capex reduction efforts. DBRS could consider changing the rating trend to Stable only when Newalta starts to show meaningful improvement in its liquidity situation and financial metrics from its Q2 2016 levels. Conversely, faster-than-expected cash burn or further deteriorations in operating results could lead to further downgrades.

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

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.