DBRS Confirms NOVA Chemicals Corporation at BBB (low) with a Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating and the Unsecured Notes & Debentures rating of NOVA Chemicals Corporation (NOVA or the Company) at BBB (low) with a Stable trend. The confirmation recognizes NOVA’s weakened financial profile following the acquisition of the Geismar olefins plants and other related assets (Geismar) but also recognizes the benefit from the implied support from NOVA’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. In addition, the Stable trend reflects DBRS’s expectation of gradual improvement in NOVA’s operating results and associated credit metrics (as defined by DBRS) in 2018 and beyond. With this rating action, the Company’s ratings are removed from Under Review with Developing Implications where they were placed on April 17, 2017.

The Company completed the acquisition of Geismar on July 6, 2017, as planned. The acquisition was funded by the issuance of $2.1 billion senior notes in June 2017 and cash on hand. Even though NOVA reported stronger year-over-year performance in its recently released first half 2017 results (period ended June 30), the large increase in debt related to funding the Geismar acquisition has materially weakened all credit metrics. As a result of the deterioration in its financial profile, NOVA’s credit profile (a combination of the business risk profile and financial risk profile) on a stand-alone basis is only at the high end of the BB range.

Nevertheless, DBRS concludes that IPIC has demonstrated its continued support of NOVA based on the following: (1) NOVA remains strategic to IPIC, its only major holding in the petrochemical industry in North America. A recent announcement that NOVA, Borealis AG, another IPIC-controlled chemical company, and Total Petrochemicals and Refining USA Inc. had signed a preliminary agreement to form a joint venture, indirectly affirms NOVA’s strategic value to IPIC in its goal of becoming a global player in the petrochemicals industry; (2) The cancellation of a planned dividend payment of $250 million in Q4 2016 to conserve capital at NOVA amply demonstrates IPIC’s commitment to ensure sufficient liquidity at NOVA; (3) IPIC has a substantial financial stake in NOVA, with equity valued at about $3.6 billion (on a book value basis) as at June 30, 2017. As a result of the positive impact on the ratings provided by the implied support from IPIC, DBRS confirms NOVA’s ratings at BBB (low) as indicated in the press release dated April 17, 2017.

DBRS anticipates a decline in operating profit in NOVA’s existing operations in 2017 because of a large turnaround (extended downtime associated with a major schedule maintenance) and unplanned outages at the Corunna, Ontario, facility. Nevertheless, the addition of Geismar, a fully functional plant, will immediately contribute to earnings and cash flow leading to higher EBITDA and cash flow from operations in 2017 versus 2016. Furthermore, DBRS expects operating results and cash flow from operations to show modest improvement in 2018 and beyond, supported by increasing market demand in line with global GDP growth and increased production (Corunna’s return to production after the turnaround and capacity increases). However, with a number of capital projects needing significant cash investment, it is unlikely that NOVA will have much free cash available for meaningful deleveraging actions. Hence, DBRS expects all key credit metrics to show modest improvement despite higher earnings and for the current rating to remain unchanged in the medium term.

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.

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