MOODY'S CONFIRMS ULTRAMAR CORPORATION'S DEBT RATINGS AT BAA2/PRIME-2; RAISES DIAMOND SHAMROCK INC. SECURITIES TO BAA2/PRIME-2
New York, 12/23/1996 -- Moody's Investors Service confirmed the Baa2 long-term debt and Prime-2 commercial paper ratings of Ultramar Corporation, and concurrently upgraded to Baa2 and Prime-2 the long-term debt and commercial paper ratings of Diamond Shamrock Inc., concluding a rating review announced September 23, 1996. Effective on December 3, 1996, the two companies merged via a stock swap into a new company, Ultramar Diamond Shamrock Corporation, with Diamond Shamrock's debt assumed by the new entity. The merged company has 475,00 barrels per day of refining capacity and about 4,400 retail outlets in the United States and Eastern Canada.
Moody's had placed both Ultramar's Baa2 rated long-term debt and Diamond Shamrock's securities under review for possible upgrade, but concluded that a convergence of the two companies' ratings reflects the consolidated leverage and cash flow profile, as well as the industry risks facing Ultramar Diamond Shamrock. The merged entity will be more highly leveraged than was Ultramar, but will also reflect debt reduction from Diamond Shamrock's own asset sales program and the repatriation of cash from Ultramar's Canadian subsidiary. Post-merger, Ultramar Diamond Shamrock's total debt is about 50% of capitalization, in addition to off balance sheet liabilities primarily to finance retail expansion.
Ultramar Diamond Shamrock faces margin pressures, as well as the continuing effect of refining and retail overcapacity, particularly in its California and Eastern Canadian markets. However, following expected restructuring charges in 1996, the company's cash flow and earnings should benefit by 1998 in the area of $75 million pre-tax as it implements cost saving measures in a variety of areas, including corporate overhead, crude oil sourcing, distribution, and insurance. In addition, while the merger is not predicated on extensive market overlap or capacity reduction, there will be opportunities through its Texas and California refining and distribution systems to pursue further downstream integration in growth markets such as Arizona. The rating agency expects these efforts, as well as the recent completion by both companies of a range of refinery yield and distribution investments, to benefit wholesale margins and competitive retail conditions, leading to a gradual improvement in combined earnings and financial leverage.
Moody's also noted that as industry consolidation continues, Ultramar Diamond Shamrock wants to expand via asset acquisitions in retail marketing, distribution, and possibly refining capacity. Such actions would have to be analyzed relative to their strategic importance and cost profile, but Ultramar Diamond Shamrock's ability to maintain its credit quality would depend largely on the use of an appropriate mix and debt and common equity to finance such expansion.
Securities confirmed include Ultramar's notes, medium-term notes and the guaranteed notes of Ultramar Credit Corporation, as well as Ultramar's commercial paper, rated Baa2 and Prime-2, respectively. The securities of Diamond Shamrock Inc. upgraded include its notes, medium-term notes and debentures, raised to Baa2 from Baa3, its commercial paper, raised to Prime-2 from Prime-3, and its cumulative convertible preferred stock, raised to "baa3" from "ba1."
Ultramar Diamond Shamrock Corporation is headquartered in San Antonio, Texas.
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