DBRS Confirms Ratings on NOVA Chemicals Corporation at BBB (low) with Stable Trends

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 Stable trends. In 2018, NOVA disclosed an estimated $1.05 billion litigation payment due to Dow Chemical Canada ULC and Dow Europe (collectively, Dow) relating to the operation of the jointly owned E-3 ethylene cracker in Joffre, Alberta, from 2001 to 2012; the litigation payment has not yet been made. The rating confirmations reflect (1) the Company’s sufficient liquidity in place to cover the payment; (2) DBRS’s view that leverage, while higher both on a pro-forma basis and in the near term, will gradually reduce in the medium term; and (3) 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 trends are based on DBRS’s expectation that the Company will be able to reduce leverage to levels that are more commensurate with the ratings in the medium term.

NOVA is currently undertaking major growth projects that are capital intensive and will start contributing to earnings in the 2021–2022 time frame. The Company is engaged in significant investments involving its operations in Ontario, namely the 50% expansion of its ethylene cracker, which will provide feedstock to a new polyethylene facility. In addition, NOVA is participating in a joint venture (JV) in the U.S. Gulf Coast that includes an existing polyethylene facility and will include an under-construction ethane steam cracker and a new under-construction polyethylene unit, all located in Texas. Total S.A. (Total) and Novealis Holdings LLC (Novealis) each own 50% of the JV. Novealis is 50% owned by NOVA and 50% owned by Borealis AG (Borealis), a European chemical company that is majority owned by NOVA’s parent, Mubadala. DBRS anticipates that NOVA’s capital investment for its growth projects and its share of the JV projects will be about $2.5 billion until 2022 when the projects are expected to be fully completed, ramped up and contributing to earnings. To date, NOVA has already spent $0.8 billion of the projected $2.5 billion.

DBRS anticipates lower earnings and cash flows in 2019 compared with 2018 as a result of weaker pricing expectations, particularly in the Company’s polyethylene segment. Despite the expected $1.05 billion Dow litigation payment 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. At March 31, 2019, the Company had strong liquidity with a cash balance of $858 million, an unused and recently upsized $1.5 billion revolving credit facility, an undrawn $500 million term loan and two accounts receivable securitization programs that are more than sufficient to cover the expected $1.05 billion litigation payment. DBRS notes that the ongoing E-3 litigation with Dow for the period of operations between 2013 and judgment has not yet been resolved and could lead to another litigation payment, potentially in 2020. DBRS will assess the impact of the potential payment, if any, at that time when there is 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 JV between NOVA and Borealis (another Mubadala-controlled chemical company) and Total indirectly affirms NOVA’s strategic value to Mubadala as 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 $3.5 billion (on a book-value basis) as at March 31, 2019.

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.

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

The principal methodologies are Rating Companies in the Industrial Products Industry (February 2019) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on dbrs.com under Methodologies & Criteria.

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.

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada