MOODY'S CONFIRMS SR. UNSEC. DEBT RATINGS OF CLARK USA AT B3 AND CLARK R&M AT Ba3
New York, 07-17-98 -- Moody's Investors Service confirmed the debt ratings of Clark USA, Inc., a holding company, and its chief operating subsidiary, Clark Refining & Marketing, Inc. (R&M). Ratings confirmed are Clark USA's $175 million of 10 7/8% senior unsecured notes, due 2005, at B3, and its $63 million of 11 «% exchangeable preferred stock, due 2009, at "caa"; and Clark R&M's $175 million of 9 1/2% senior unsecured notes, due 2004, at Ba3, its $125 million floating rate term loan, due 2004, at Ba3, its $100 million of 8 3/8% senior unsecured notes due 2007, at Ba3, and its $175 million of 8 7/8% senior subordinated notes, due 2007, at B2. Moody's also confirmed Clark R&M's $400 million secured revolving bank credit facility at Ba2.
At the same time, Moody's assigned a Ba3 rating to Clark R&M's proposed $75 million floating rate term loan, due 2005, and a Ba3 rating to its proposed $150 million issue of senior unsecured notes, due 2008. The net proceeds of the offerings will be combined with available cash, including some $74 million expected from the sale of pipeline assets, to fund the approximately $250 million cost of a refinery to be acquired from British Petroleum. (The acquisition cost consists of $175 for the refinery, which is located in Lima, Ohio, and $75 million for inventory and transaction fees.)
The ratings confirmation reflect Clark's history of uneven operating results; its modest coverages of interest; its moderate required capital expenditures for 1998/99, largely for turnaround costs; and high debt ratios, with debt/EBITDA of 4.4 times, and debt/total capitalization of 98% (including $68 million in preferred stock) for the last twelve months ending May 31, 1998.
The volatility of the refining industry is reflected in Clark's EBITDA which, for 12-months ending May 30, 1998 was $143.4 million and compares with $70.1 million for the same period in 1997. The increase over the 12-month period ending May 31, 1998 reflects stronger crack spreads and crude differentials on a year-over-year basis, and reduced turnaround activity.
Moody's notes that subsequent to Clark's imminent issuance of $225 million in total additional debt, it is highly unlikely that the company could issue additional debt and retain its current Moody's debt ratings. Any future acquisitions, therefore, would most likely be funded with equity, raised either from direct additional investment by the Blackstone Group, the investment group which already owns 68% of Clark, or from proceeds of an Initial Public Offering.
The incompatibility of Clark increasing its debt ratios in the future while retaining its current ratings levels is further signaled by the company's announcement of a pending $600-$700 million proposed coker construction project at its Port Arthur refinery. Financing plans for this project has not yet been finalized. The proposed project stems from Clark's recent agreement with P.M.I. Comercio Internacional, S.A. de C.V., an affiliate of Petroleos Mexicanos, the Mexican state oil company (rated Ba2 by Moody's), to construct the coker at Port Arthur to receive 150,000 to 210,000 b/d of heavy sour Maya crude oil from P.M.I. under a supply contract. If Clark chooses to proceed, construction is expected to begin in the first half of 1999, with estimated completion in the first quarter of 2001. The project will include construction of an 80,000 b/d delayed coker and a 35,000 b/d hydrocracking unit and expansion of the crude unit capacity to approximately 250,000 b/d. If the project is completed, the Port Arthur refinery will have the ability to process heavy, sour crude oil up to an estimated 80% of its capacity.
Both Clark and Blackstone believe that the margin stabilization features of the P.M.I. contract, and the returns and incremental EBITDA from the coker project strongly mitigate this large investment. Clark will also most likely seek to fund the project on a non-recourse basis. However, Moody's believes that the coker's incorporation into the Port Arthur Refinery complex would preclude Clark from walking away from the project's obligations, even if Clark's arrangements with P.M.I. were to be terminated and replaced with less favorable crude supply terms with other parties.
The ratings, however, also consider the company's overall improved operating efficiency, such as productivity gains from increased throughput of cheaper heavy and sour crude, benefits of debottlenecking, and the higher production volumes and reliability rates, and therefore lower costs and increased margins, of its refined fuel and non-fuel products. The company believes that these gains in efficiency place it in a better position to achieve sustained profitability in the reporting periods ahead. But, since all of Clark R&M's refineries have not yet been completely upgraded to automated processing control systems, their unit operating costs are still higher and yields lower compared to those of state-of-the-art refineries. Nevertheless, these gains contrast favorably with the consistently poor performance of prior years due to the severe market conditions which, coupled with reduced capital improvements to enhance efficiency, plagued Clark R&M's current management since it took full control of the company in 1992.
The ratings also consider Clark's strategic moves to further strengthen its refining fundamentals, including its acquisition of the Lima refinery; the operational synergies expected from the acquisition, including its strategic fit into Clark's existing core Midwest retail and wholesale markets where the company already has distribution capability; the approximately 46% increase in Clark's total crude oil capacity to 540,000 barrels per day (b/d) from 370,000 b/d, as a result of the Lima acquisition; and the continued support of the Blackstone Group, which controls Clark by its equity investment of $134 million, representing a 68% economic interest and a 79% voting interest in Clark.
The Lima refinery acquisition will provide Clark with its fourth refinery. Its operational significance in terms of crude runs and refining margins is anticipated to rank second only behind the company's Port Arthur refinery, which has a current crude oil throughput capability of 225,000 b/d and a Nelson complexity rating of 10.2. (Clark's other refineries are Blue Island, near Chicago, and Hartford, near St. Louis, Missouri.) The Lima refinery is a highly automated, modern oil refinery with a Nelson complexity rating of 8.7, and was designed to process predominantly light sweet crude oil. Its approximately 170,000 b/d crude oil capacity makes it large enough to realize economies of scale, and Clark anticipates a high operating efficiency and low unit costs from its operations.
Clark believes that the Lima refinery's Midwest location has historically provided it with a transportation cost advantage and less gross margin volatility than refineries have in other regions, since demand for refined products has exceeded supply in the region. Clark also believes that the refinery's location complements its own existing assets in the region and makes a good strategic fit.
The Lima refinery will also complement Clark's Port Arthur refinery, located in Port Arthur, Texas, which has the ability to process 100% sour crude oil, including up to 20% heavy sour crude oil, and has coking capabilities. Heavy sour crude oil costs are traditionally substantially lower than the costs of light sweet crude oil such as West Texas Intermediate, and the refinery's Texas Gulf Coast location provides access to numerous cost effective domestic and international crude oil sources.
Pro forma for the offerings, Clark USA's consolidated debt-to-capitalization at twelve months ending May 31, 1998 decreased to 92.5% from 98% for the five months ending May 31, 1998 due, in part, to the expected monetization of pipeline assets. Its significant cash balance of $212 million at May 31, 1998, however, mitigates some of the risks of high debt. Clark historically keeps about $150 - $200 million of cash on hand to support underlying working capital and liquidity swings from a large revenue base ($4.3 billion at year ending December 31, 1997) and protect them from the inherent volatility of the refining business.
The one-notch rating differential between Clark R&M's $400 million secured bank facility (Ba2) and its senior unsecured notes (Ba3) reflect the value of the collateral backing the facility, consisting of Clark R&M's current assets of cash, investments, eligible receivables and hydrocarbon inventories and trademarks. At March 31, 1998, its current assets included approximately $144 million of cash and current investments, $82 million of accounts receivable, and $281 million of inventory. As of March 31, 1998, Clark R&M had no cash borrowings but had about $164 million of letters of credit outstanding under this facility. Clark R&M uses letters of credit to make crude purchases.
The new notes will be placed in privately negotiated transactions without registration under the Securities Act of 1933 under circumstances reasonably designed to preclude a distribution in violation of the Act. The issuance has been designed to permit resale under SEC Rule 144A.
Headquartered in St. Louis, Missouri, Clark USA, Inc. is a non-operating holding company. Clark USA, Inc. owned by The Blackstone Group (68%), Occidental Petroleum (31%), and Gulf Resources (1%). Clark Refining & Marketing, Inc., refines and markets petroleum products.
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