DBRS Places Superior Plus Ratings Under Review with Developing Implications

DBRS Limited (DBRS) has today placed the Issuer Rating and Senior Secured Notes rating of Superior Plus L.P. (SP-LP) of BB (high) and the Senior Unsecured Debentures rating of BB (low) Under Review with Developing Implications. The under review status follows Superior Plus Corporation’s (SP-Corp or the Company) announcement of an agreement to ultimately acquire all equity interests of Canwest Propane’s (Canwest) retail propane business from Gibson Energy Inc. for $412 million in cash payment, subject to certain customary adjustments. Under the agreement, SP-Corp expects to initially purchase an option (the Option) to acquire all Canwest shares for the full consideration, which provides the Company with the rights to exercise and acquire the shares for a nominal payment upon regulatory approval and satisfaction of closing conditions. The purchase of the Option is expected to occur no later than April 3, 2017, which will entitle SP-Corp to the benefits of Canwest’s profit from the Option acquisition. The Company currently expects the acquisition of Canwest shares to be completed in the second half of 2017.

In placing the ratings under review with developing implications, DBRS signals that the Company’s ratings could potentially be affected by the increased uncertainties relating to regulatory approval of the acquisition and business integration as well as possible changes in financing arrangements. At the same time, DBRS opines that the acquisition, the related financing arrangement and subsequent expectation of deleveraging, if executed as planned, are unlikely to affect SP-LP’s ratings on their own.

DBRS indicated in its July 5, 2016, rating report on SP-LP that, although financial metrics following the sale of its Construction Products Distribution business could be strong for the current ratings, the ratings reflected DBRS’s expectation that the Company would continue to seek acquisition opportunities and target unadjusted debt-to-EBITDA toward the low end of its stated target of 3.0 times (x) to 3.5x range in the longer term.

SP-Corp expects that the proposed Option acquisition will be entirely financed by increased borrowing, initially through its credit facility, and that there will not be any assumed debt in Canwest. Within these expectations, DBRS estimates that SP-Corp’s pro forma combined 2016 adjusted debt-to-EBITDA will increase to within the 3.9x and 4.1x range in the last 12 months ended Q3 2016 (LTM Q3 2016; 3.7x on an unadjusted basis) and adjusted cash flow-to-debt will decrease to within the 16% to 18% range from 23% in the LTM Q3 2016. These estimated pro forma financial metrics are moderately weak for the ratings and exceed the Company’s stated leverage debt-to-EBITDA target. DBRS expects SP-Corp to diligently de-lever following the completion of the acquisition to conform with its long-term leverage target (unadjusted debt-to-EBITDA of 3.0x to 3.5x) as the Company has done in the past years.

Canwest is one of the largest propane supply and distribution companies in Western Canada with 37 main branches, 3.2 million gallons of storage capacity and a fleet of more than 400 trucks, trailers and tractors. SP-Corp expects Canwest to be cash-flow accretive in its first full year upon exercising the Option and completion of the acquisition. The Company also expects cost synergies estimated to exceed $20 million to be achieved mainly through corporate overhead reduction and optimization of fleet and facilities.

DBRS does not expect the acquisition, if materialized, to have a meaningful impact on SP-Corp’s overall business risk profile. While Canwest’s addition could result in a stronger market position, economies of scale and wider geographic diversification of its energy distribution business, these benefits could be partly offset by Canwest’s focus in Western Canada and toward industrial and commercial customers compared with SP-LP’s existing business. This could increase exposure to the more volatile oil and gas sector and sensitivity to weather. In addition, potential issues arising from business integration could potentially cause management distraction and affect the Company’s business risk profile.

Going forward, DBRS will review the progress of the acquisition and financing arrangement as more details become available while continuing to review SP-LP’s operating results and overall financial metrics. Upon completion of the acquisition and financing arrangement without material deviation from its plan or in the event that the acquisition fails to materialize as planned, DBRS could consider confirming the ratings shortly after the completion of the acquisition. Conversely, DBRS could consider lowering the ratings in the event that SP-Corp’s operating performance and financial metrics are pressured by integration-related issues or adverse market conditions.

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 principal methodologies are Rating Companies in the Industrial Products Industry (April 2016) and Rating Companies in the Merchandising Industry (September 2016), which can be found on dbrs.com under Methodologies.