DBRS Maintains NOVA Chemicals Corporation Under Review with Developing Implications

DBRS Limited (DBRS) has today maintained the Under Review with Developing Implications status on the Issuer Rating and the Unsecured Notes & Debentures rating of NOVA Chemicals Corporation (NOVA or the Company) pending completion of the debt-financed acquisition of the Geismar olefins plant and other related assets (Geismar) for approximately USD 2.1 billion (see DBRS press release dated April 17, 2017). The transaction is expected to close in summer 2017. In resolving the Under Review status, DBRS will assess the implied support from the Company’s parent, International Petroleum Investment Company (IPIC), which is wholly owned by Mubadala Investment Company, which in turn is wholly owned by the Government of the Emirate of Abu Dhabi as well as NOVA’s plan to restore its weakened key credit metrics.

DBRS notes that the addition of Geismar will modestly strengthen NOVA’s market position with a larger size and expanded reach to the U.S. gulf coast where there is abundant supply of low-cost natural gas and a better position to grow the export business. The availability of land adjacent the plant also offers NOVA the potential to increase its polyethylene capacity; however, the Company’s business profile remains in the BB range because of its high exposure to the very volatile basic chemical industry.

NOVA performed broadly in line with expectations in 2016 with stronger earnings and margins despite slightly declined revenues; however, a large dividend payment to IPIC led to a modest deficit in free cash flow. Nevertheless, absent the large debt associated with the Geismar acquisition, the Company’s much strengthened credit metrics (as defined by DBRS) could have been sufficient to offset the weak business profile and support the Company’s rating at BBB (low) on a stand-alone basis.

NOVA anticipates a decline in operating profit in its existing operations in 2017 because of a large turnaround (extended downtime associated with a major schedule maintenance) at Corunna. Although the addition of Geismar, a fully functional plant, will immediately contribute to earnings and cash flow, the large increase in debt will still cause a material deterioration in all key credit metrics. With all credit metrics weakened post acquisition, DBRS believes that the Company’s rating will have to rely on the implied support from IPIC to remain at BBB (low).

Actions from IPIC to demonstrate its continued support of NOVA, such as (1) a recent announcement that NOVA, Borealis AG, another IPIC-controlled chemical company, and Total Petrochemicals and Refining USA Inc. have a signed a preliminary agreement to form a joint venture, indirectly affirming NOVA’s strategic value to IPIC and (2) cancelling a planned dividend payment of $250 million in Q4 2016 to conserve capital at NOVA, will be viewed favourably by DBRS.

Notes:
All figures are in U.S. 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 (February 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.