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. NOVA recently disclosed an estimated $1.05 billion litigation payment being due to Dow Chemical Canada ULC (Dow) relating to the operation between 2001 to 2012 of the jointly owned E-3 ethylene cracker at Joffre, Alberta. The rating confirmations reflect the fact that NOVA has sufficient liquidity to cover the payment, DBRS’s view that leverage, while higher both on a pro forma basis and in the near term, will gradually come down in the medium term, and DBRS’s expectation for continued implicit support from NOVA’s parent, Mubadala Investment Company (Mubadala), which is wholly owned by the Government of the Emirate of Abu Dhabi. In addition, the Stable trend is based on DBRS’s expectation that NOVA’s solid fundamental operating performance and free cash flow generation will be used to reduce the higher leverage in the medium term and support capital project funding.

The Company is currently undertaking growth projects that are capital intensive and will start contributing to earnings in the 2020–2022 time frame. In December 2017, NOVA announced significant investments involving its operations in Ontario, namely the 50% expansion of its ethylene cracker, which will provide feedstock to a new polyethylene facility and increase NOVA’s polyethylene annual capacity by 950 million pounds. In addition, in February 2018, the Company announced its participation in a joint venture in the U.S. Gulf Coast that will include an under-construction ethane steam cracker, an existing polyethylene facility and a new polyethylene unit, all located in Texas. Total S.A. (Total) and Novealis Holdings LLC (Novealis) will each own 50% of the project. Novealis is a joint venture that is 50% owned by NOVA and 50% owned by Borealis AG (Borealis), a European chemical company, which is majority owned by NOVA’s parent, Mubadala. On May 23, 2018, Total, Borealis and NOVA indicated that they had closed the transaction. DBRS anticipates NOVA’s capital investment for these two projects will be about $2.5 billion until 2022 when the projects will be fully completed, ramped up and contributing to earnings.

DBRS anticipates further improvements in earnings and operating cash flow in 2018 and 2019, supported by increasing volumes and overall favourable price realizations. Despite the 2017 debt-funded $2.1 billion Geismar acquisition, the expected $1.05 billion Dow litigation payment in the second or third quarter of 2018 and significant capital investments in the next few years, DBRS expects that NOVA will be able to manage its leverage and liquidity in a manner consistent with its current rating, which is also supported by DBRS’s expectation of continued implicit support from its parent. DBRS estimates that on a stand-alone basis, NOVA is currently at the high end of the BB range and that the current BBB (low) ratings rely on the implicit support from NOVA’s parent. At March 31, 2018, NOVA has strong liquidity with a cash balance of $601 million, a largely unused $1.2 billion revolving credit facility, and two accounts receivable securitization programs that are sufficient to cover the expected $1.05 billion litigation payment. DBRS notes that the ongoing E3 litigation with Dow for the period of operations between 2013 to judgment is not expected to be resolved until mid- to late 2019 and could lead to another litigation payment at that time. DBRS will assess the impact of the potential payment, if any, at that time when there will be more clarity regarding the amount and terms. DBRS’s expectation for continued support from Mubadala is based on the following: (1) NOVA remains strategic to Mubadala, its only major holding in the petrochemical industry in North America. The formation of a joint-venture between NOVA and Borealis (another Mubadala-controlled chemical company) and Total indirectly affirms NOVA’s strategic value to Mubadala in its goal of becoming a global player in the petrochemicals industry; (2) The flexible dividend policy demonstrates Mubadala’s commitment to conserve capital and ensure sufficient liquidity at NOVA; (3) Mubadala has a substantial financial stake in NOVA, with equity valued at about $3 billion (on a book-value basis) as at March 31, 2018. While currently not expected, leverage as expressed by adjusted debt-to-EBITDA (as defined by DBRS) above 3.0 times for a sustained period of time and evidence of weaker support from NOVA’s owner could lead to a negative rating action. A positive rating action is currently unlikely and would require much stronger credit metrics and more clarity around the ongoing litigation described above.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Industrial Products Industry (February 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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