DBRS Confirms Superior Plus and Removes Under Review with Developing Implications Status; Discontinues Senior Secured Notes Rating

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Secured Notes rating of Superior Plus LP (SP-LP or the Issuer) at BB (high) and the Senior Unsecured Debentures rating at BB (low), based on its unchanged recovery rating of RR6, all with Stable trends. This action follows the conclusion of DBRS’s review of Superior Plus Corp.’s (SP-Corp; SP-LP’s holding company) acquisition of Canwest Propane’s (Canwest) retail propane business in Western Canada, and removes SP-LP’s ratings from Under Review with Developing Implications. DBRS is subsequently discontinuing the Senior Secured Notes rating at the request of the Issuer. The discontinuation is unrelated to the rating action and is as a result of these Notes having been repaid in full.

On February 13, 2017, DBRS placed the ratings of SP-LP Under Review with Developing Implications following the announcement that Superior Plus Corp. (SP-Corp or the Company) had agreed to acquire from Gibson Energy Inc. its Canwest retail propane business for $412 million in cash (the Transaction), subject to certain customary adjustments. The Transaction was debt financed and no debt of Canwest was assumed.

SP-Corp stated that it would fully integrate Canwest’s business into SP-LP’s Energy Distribution (ED) division, and estimated that it would achieve $20 million of annual synergies, primarily through operating expense reductions by leveraging off of SP-LP’s existing footprint.

In its review, DBRS focused on (1) the impact on the business risk profile from adding the Canwest assets, including the potential for synergies and integration risks, (2) SP-Corp’s consolidated pro forma financial risk profile and commitment to and capacity for achieving its deleveraging goals, and finally (3) confirmation that the final terms of the Transaction were consistent with DBRS’s expectations.

During the review of the Transaction, DBRS determined that the Transaction would have a modest positive impact on the business risk profile. The Canwest acquisition added customers and businesses aligned with the Company’s core competencies, strengthened SP-Corp’s already leading market position in the Canadian propane marketing and distribution market and broadened its geographic footprint. However, a significant proportion of the acquired Canwest business is linked primarily to the oil and gas sector, which increases exposure to a very cyclical end-user market and to the vagaries of weather fluctuations in Western Canada.

DBRS also reviewed the Company’s post-Transaction deleveraging plans and believes that steady deleveraging is achievable. By DBRS’s definition/calculation, debt-to-EBITDA, adjusted for operating leases, rose to 4.2 times in the last 12 months (LTM) to Q2 2017. While this is somewhat weak for the rating, considering the Company’s business strengths, it is not inconsistent with the current rating. DBRS anticipates that through a combination of modest earnings growth and debt reduction, the ratio should decline well below 4.0 times (by DBRS’s definition) over the next two years.

When the Transaction closed, DBRS assessed the closing terms, and aside from the Competition Bureau’s requirement that less than an estimated 5% of the Canwest retail propane volumes be divested, determined that they were substantially consistent with expectations. As a result, consistent with DBRS’s guidance in its February 13, 2017, press release, and also considering the favourable results of DBRS’s investigation into all other factors affecting the Company’s credit profile, DBRS has confirmed SP-LP’s ratings with Stable trends, as noted above.

A concurrent assessment of other factors affecting SP-LP’s credit rating beyond the Transaction supports the action to confirm the ratings with Stable trends. The ratings remain well supported by SP-Corp’s excellent brand strength and reputation for outstanding customer service. The importance of the Company’s fuel and chemical products to clients and the relatively well-diversified customer base ensures a steady level of demand for SP-Corp’s products. The economic drivers of propane demand are generally different from those underlying demand for the Company’s Specialty Chemicals products, offering some diversification benefits over the long term. The ratings are also supported by the Company’s position as a leading distributor of propane in Canada. Challenges include external factors beyond the Company’s control, such as seasonal and cyclical drivers in the Company’s end markets, and volatile raw materials costs. The fragmented nature of the propane distribution market and the financial and integration risks associated with the Company’s current acquisition strategy are also structural challenges.

SP-Corp began the LTM period to Q2 2017 by selling its Construction Products Distribution (CPD) business for USD 325 million. CPD was a lower-margin business with substantial exposure to the volatile U.S. housing market, and the divestiture enabled SP-Corp to substantially reduce its debt and strengthen its balance sheet. Operating results (excluding CPD) were generally modestly favourable during the period, supported by contributions to the ED business from the Transaction beginning as of March 1, 2017. The Specialty Chemicals business benefited from more favourable market conditions in 2017 for key Chlor-alkali products: caustic potash volumes benefited from improved agricultural demand, increased activity in the oil and gas sector was supported hydrochloric acid sales and caustic soda conditions improved as Gulf Coast competitors shipped more product overseas. As discussed in DBRS’s February 13, 2017, press release, significant borrowing during the period was required to facilitate the Transaction.

DBRS anticipates that the Company will make modest progress toward reducing its leverage over the next two years, with adjusted cash flow-to-debt rising to over 20% and adjusted debt-to-EBITDA improving to around 3.5 times in 2019 from 19.7% and 4.2 times, respectively, in the LTM period to Q2 2017, both as per DBRS’s definitions. The projected metrics would continue to support the current ratings.

Overall, the operating performance and modestly improved business risk profile continue to support the current ratings. DBRS expects the Company to remain acquisitive and, given the fragmented nature of the propane distribution sector, there is no shortage of tuck-in acquisition targets available. However, significant debt-financed acquisitions could lead to a negative rating action, especially if they were to be undertaken during a period of notable market weakness. A positive rating action would likely only be considered if the Company demonstrated a commitment to a materially stronger financial profile over a period of years.

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 and Rating Companies in the Services Industry (previously, DBRS’s second principal methodology used was Rating Companies in the Merchandising Industry), which can be found on dbrs.com 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.