Morningstar DBRS Assigns an Issuer Rating of BB (high) and Provisional Senior Unsecured Notes Rating of BB to Chemtrade Logistics Inc., Stable Trends

DBRS Limited (Morningstar DBRS) assigned a final Issuer Rating of BB (high) and a provisional Senior Unsecured Notes rating of BB to Chemtrade Logistics Inc. (Chemtrade or the Company), both with Stable trends. The Senior Unsecured Notes rating is based on a recovery rating of RR5.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings are supported by Chemtrade’s strong market position within its key product segments in North America, solid customer and end-market diversification, and barriers to entry in a number of its product categories. The credit ratings also consider the intense competitive environment within the industry, the Company’s exposure to fluctuations in commodity prices, and uncertainty surrounding the long-term viability of the production of liquid chlorine products at the Company’s North Vancouver facility.

The provisional credit rating on the up to $250 million proposed Senior Unsecured Notes (the Notes) is not a final credit rating with respect to the above-mentioned security and may change or be different from the final credit rating assigned or may be discontinued. The provisional credit rating of BB is based on annual reports; quarterly financial statements; management budgets; a Description of Notes for the proposed Senior Unsecured Notes; and information provided by Chemtrade, including that the guarantors and co-borrowers of the existing Credit Facilities are the same as for the Notes, received to Morningstar DBRS as of August 21, 2024. The assignment of final credit ratings is subject to receipt by Morningstar DBRS of all information and final documentation that Morningstar DBRS deems necessary to finalize the credit rating.

CREDIT RATING DRIVERS
Should Chemtrade materially improve its business-risk profile, including increased size and scale, while maintaining key credit metrics at commensurate levels, a positive credit rating action could occur. Conversely, should Chemtrade’s credit metrics weaken for a sustained period (i.e., debt-to-EBITDA increasing materially above 3.00 times (x)) as a result of a deterioration in operating income, or more aggressive financial management, a negative rating action could ensue. Furthermore, should the Company materially draw down on its existing revolving credit facilities, such that the recovery position of the Senior Secured Notes is weakened, a negative rating action on said Notes could ensue.

EARNINGS OUTLOOK
Looking ahead, Morningstar DBRS anticipates Chemtrade’s earnings profile will remain adequate for the current rating despite an expectation that the Company will experience some earnings moderation in 2024, compared with record 2023 levels, before stabilizing through 2025. Before returning to growth in 2025, Morningstar DBRS forecasts that in 2024, revenue will decline in the mid-single digits from $1.85 billion in 2023. The decline is expected to be primarily driven by the scheduled biennial North Vancouver plant turnaround; lower average selling prices across a number of products, including caustic soda; and the impact of the sale of the P2S5 business in Q4 2023, partially offset by higher prices in the water treatment business and higher revenue attributable to sodium chlorate, HCl, and chlorine. Morningstar DBRS anticipates EBITDA margins to decline to approximately 24% in 2024 and 2025, compared with approximately 27% in 2023, primarily driven by the impact of lower caustic pricing, the plant turnaround, and higher corporate costs related to compensation and unfavourable foreign exchange impacts, partially offset by the higher water treatment margin, despite the increased raw materials cost in the segment. As such, Morningstar DBRS anticipates EBITDA to decline into the Company’s guidance range of $430 to $460 million in 2024, from approximately $500 million in 2023, before settling in the $400 to $450 million range in 2025.

FINANCIAL OUTLOOK
Morningstar DBRS expects Chemtrade’s financial profile to remain strong for the current rating category, supported by conservative capital allocation practices, despite the expectation of normalization in credit metrics due to lower earnings year over year in 2024. Morningstar DBRS anticipates cash flow from operations will continue to track operating income, declining below $350 million in 2024 and 2025. Capital expenditures (capex) are expected to increase slightly to approximately $180 million in 2024, from $166 million in 2023, as the Company is expected to invest in growth initiatives related to the ultrapure sulphuric acid and the water treatment businesses. Morningstar DBRS forecasts capex to moderate slightly in 2025 but to remain above $150 million. Morningstar DBRS anticipates dividends to increase to approximately $80 million in 2024, and track operating income in line with the Company’s dividend policy over the medium term. Morningstar DBRS believes Chemtrade will use free cash flow and funds from the Notes for the repayment of outstanding convertible debentures and lease principal payments. As such, credit metrics should remain within the range considered acceptable for the current rating category.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of Chemtrade Logistics Inc. the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Chemtrade Logistics Inc., the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Chemtrade Logistics Inc., the BRA and the FRA carry approximately equal weight.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Industrial Products Industry (April 15, 2024)
https://dbrs.morningstar.com/research/431173

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024) – https://dbrs.morningstar.com/research/431186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have has also been applied:

-- Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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@morningstar.com.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of the final credit ratings on the above-mentioned securities are subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

The credit rating was not initiated at the request of the rated entity. The credit rating was initiated at the request of a third party.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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