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Rating Action:

Moody's affirms Valero's Baa2 ratings, maintains negative outlook

18 Nov 2021

New York, November 18, 2021 -- Moody's Investors Service ("Moody's") affirmed all ratings of Valero Energy Corporation (Valero) and its subsidiaries Ultramar Diamond Shamrock Corporation, Valero Energy Partners LP and Diamond Shamrock Inc. Moody's also assigned Baa2 ratings to Valero's proposed senior unsecured notes. The outlook on all ratings remains negative.

Affirmations:

..Issuer: Valero Energy Corporation

....Senior Unsecured Shelf, Affirmed (P)Baa2

....Subordinate Shelf, Affirmed (P)Baa3

....Junior Subordinate Shelf, Affirmed (P)Baa3

....Pref. Stock Preferred Stock, Affirmed Ba1

....Pref. Shelf, Affirmed (P)Ba1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Ultramar Diamond Shamrock Corporation

....Subordinate Regular Bond/Debenture, Affirmed Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Valero Energy Partners LP

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Diamond Shamrock Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Corpus Christi (Port of) TX, Ind. Dev. Corp.

....Senior Unsecured Revenue Bonds, Affirmed Baa2

..Issuer: Gulf Coast Industrial Development Authority

....Senior Unsecured Revenue Bonds, Affirmed Baa2

..Issuer: Gulf Coast Waste Disposal Authority, TX

....Senior Unsecured Revenue Bonds, Affirmed Baa2

..Issuer: St. Charles (Parish of) LA

....Senior Unsecured Revenue Bonds, Affirmed Baa2

Assignments:

..Issuer: Valero Energy Corporation

....Senior Unsecured Regular Bond/Debenture, Assigned Baa2

Outlook Actions:

..Issuer: Valero Energy Corporation

....Outlook, Remains Negative

..Issuer: Ultramar Diamond Shamrock Corporation

....Outlook, Remains Negative

..Issuer: Valero Energy Partners LP

....Outlook, Remains Negative

..Issuer: Diamond Shamrock Inc.

....Outlook, Remains Negative

RATINGS RATIONALE

The affirmation of Valero's Baa2 ratings recognizes the company's effort to start reducing debt in 2021, in step with the on-going recovery in refined products demand and its improvement in operating cash flow generation. Keeping the negative outlook reflects uncertainty around Valero's commitment to its conservative financial policy and its willingness to establish a clear path to reducing debt back to levels maintained before 2020.

The Baa2 ratings are supported by the company's strong liquidity position, sizable cash balances, as well as the continuing recovery in refining. Moody's expects Valero to deliver a full recovery in EBITDA to pre-crisis levels and return to free cash flow generation in 2022, boosting its financial capacity to reduce debt.

The company's capacity to accelerate debt reduction is constrained by its focus on shareholder returns, including its standing commitment to return 40%-50% of its adjusted net cash from operations in the form of dividends or share repurchases.

Valero's rating is generally supported by the company's large operating scale, high process complexity and significant refined product export opportunities that allow optionality in feedstocks and product slates, as well as access to a wide selection of markets. Moody's also expects that earnings will be increasingly supported by contributions from its green diesel joint venture.

The negative outlook on the ratings reflects the significantly increased amount of debt carried by the company following the pandemic, which undermines the financial resilience of the company.

Valero maintains excellent liquidity. As of September 30, 2021, the company reported $3.5 billion in cash balances (excluding cash balances at JV). The company benefits from significant committed liquidity, including $3.7 billion availability under its $4 billion revolver due in March 2024. The facility contains a Debt/Capital covenant of 60%, with ample headroom as of September 2021. The facility also contains a MAE clause with respect to environmental liabilities applicable to each borrowing, and the accounts receivable sales facility contains a general MAC clause applicable to each borrowing. We expect Valero to remain well in compliance with all the covenants.

The company reported $1.3 billion available for borrowing under its 2022 receivables facility, $114 million available under its Canadian revolver facility and further $50 million available under the Letter of Credit facility.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Valero's ratings could be downgraded if the company does not establish a clear path to reducing its debt to pre-crisis levels. A change in financial policy, allowing for debt-financed acquisitions or shareholder distributions, as well as materially weaker liquidity could also lead to the downgrade of the ratings.

While not expected in the near term, a conservatively financed diversification into other more resilient business lines that have a material positive impact on the company's quality of earnings and strong leverage metrics with sustained RCF/debt above 30% could support an upgrade of Valero's Baa2 ratings.

The principal methodology used in these ratings was Refining and Marketing published in August 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1277301. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Elena Nadtotchi
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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