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Rating Action:

Moody's assigns Aa3 Issuer Rating to Koch Industries and P-1 short-term rating; downgrades Koch Resources to A1, affirms P-1 short-term rating

23 Jul 2018

Proposed implementation of new Koch Industries $8.0 billion commercial paper program

NOTE: On August 07, 2018, the press release was corrected as follows: The methodology paragraph at the end of the Ratings Rationale section was changed to the following: “The principal methodology used in rating Koch Industries, Inc. was Investment Holding Companies and Conglomerates published in December 2015. The principal methodology used in rating Flint Hills Resources, LLC., Koch Resources, LLC, Corpus Christi (Port) TX, Auth of Nueces Cnty, and Nueces (Cnty of) Tx, Port of Corpus Christi was Refining and Marketing Industry published in November 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.” Revised release follows.

NOTE: On August 01, 2018, the press release was corrected as follows: In the methodology paragraph at the end of the Ratings Rationale section, the first methodology was changed to Investment Holding Companies and Conglomerates. Revised release follows.

New York, July 23, 2018 -- Moody's Investors Service (Moody's) assigned Koch Industries, Inc. (KII) a first time Aa3 Issuer Rating and a Prime-1 commercial paper rating. Concurrently, Moody's downgraded Koch Resources, LLC's (KRLLC) Issuer Rating to A1 from Aa3 and affirmed its Prime-1 commercial paper rating. Moody's also affirmed Flint Hills Resources, LLC's (FHR) A1 Issuer Rating and Prime-1 commercial paper rating. FHR is a wholly-owned subsidiary of KRLLC, which in turn, is a wholly-owned subsidiary of privately-held Koch Industries, Inc. (KII). The outlook is stable for all three companies.

These rating actions reflect the imminent dividending of most of KRLLC's substantial liquidity to KII by the end of August as part of the implementation of KII's plan to optimize its short-term working capital structure. KII is establishing a new $8.0 billion commercial paper program under which it intends to make short-term liquidity available as needed under committed credit facilities with each of its wholly-owned subsidiary companies, including KRLLC. These facilities will replace existing bank lines and commercial paper programs currently in place at KII's subsidiary companies, including those of KRLLC. Moody's expects to withdraw KRLLC's commercial paper rating following the August closing of its intra-company credit facility with KII and the termination of KRLLC's commercial paper program.

"Koch Industries, Inc. is one of the largest privately owned companies in the US, and one whose culture is defined by a high degree of operating and financial discipline," commented Andrew Brooks, Moody's Vice President. "Subsidiary company debt levels are modest, mitigating structural subordination, with substantial liquidity at KII expected to significantly exceed KII's stand-alone and consolidated debt levels."

Assignments:

..Issuer: Koch Industries, Inc.

.... Commercial Paper, Assigned P-1

.... Issuer Rating, Assigned Aa3

Downgrades:

..Issuer: Koch Resources, LLC

.... Issuer Rating, Downgraded to A1 from Aa3

Outlook Actions:

..Issuer: Flint Hills Resources, LLC.

....Outlook, Remains Stable

..Issuer: Koch Resources, LLC

....Outlook, Remains Stable

Affirmations:

..Issuer: Corpus Christi (Port) TX, Auth of Nueces Cnty

....Senior Unsecured Revenue Bonds, Affirmed A1

....Senior Unsecured Revenue Bonds, Affirmed P-1

..Issuer: Flint Hills Resources, LLC.

.... Issuer Rating, Affirmed A1

.... Issuer Rating, Affirmed P-1

..Issuer: Koch Resources, LLC

....Senior Unsecured Commercial Paper, Affirmed P-1

..Issuer: Nueces (Cnty of) Tx, Port of Corpus Christi

....Senior Unsecured Revenue Bonds, Affirmed A1

....Senior Unsecured Revenue Bonds, Affirmed P-1

RATINGS RATIONALE

Moody's calculates the weighted average rating of KII's portfolio companies as an A2. The assigned Aa3 Issuer Rating further reflects the large scale of KII's subsidiary companies' operations and their widely diversified business mix, supplemented by very low debt levels and significant liquidity, and the adherence to disciplined financial and operating management principles. KII's operations are conducted through five wholly-owned subsidiary companies; Koch Resources, LLC (A1 stable), Georgia-Pacific LLC (A3 stable), Molex Electronics Technologies, LLC (Baa2 stable) and Guardian Industries Resources, LLC (Baa2 stable) and INVISTA Equities, LLC (Ba1 stable), together with a portfolio of equity financed investments in a series of unrelated company and investment positions held in its Koch Equity Development LLC arm. Other than a new $4.0 billion revolving credit facility to backstop its new $8.0 billion commercial paper program, there is no other debt outstanding at KII, nor is additional debt contemplated. Any long-term financing needs, which Moody's believes are minimal, will continue to be raised at the subsidiary company level. Consolidated debt levels across the entirety of KII are modest and are likely to be substantially exceeded by cash and short-term investments at KII.

KRLLC's A1 Issuer Rating reflects the company's consistent record of sizeable free cash flow generation, operated under the auspices of KII. The company's ratings are supported by its very modest financial leverage, strong operating cash flow and ample debt coverage. KRLLC has historically maintained substantial liquidity in cash and short-term investments, liquidity well in excess of its modest debt levels and operating requirements. Excess cash liquidity generated through positive free cash flow will generally be distributed to KII as periodic cash dividends, subject to a modest balance to be retained at KRLLC. Excess liquidity will henceforth be effectively replaced by a new $2 billion five-year revolving credit facility with KII. Strong operating cash flow and very low debt levels collectively offset the relatively higher business risk inherent in KRLLC's petroleum refining, fertilizer, minerals, chemicals, and commodities supply and trading operations, which expose the company to higher commodity price volatility and cyclicality, as compared to A1-rated peers.

KII and KRLLC's standing as private companies gives them a competitive advantage over their public counterparts, enabling them to focus on long-term investments and growth objectives through industry cycles, and to manage their respective balance sheets and liquidity for maximum flexibility. However, private ownership entails less market transparency. Management succession risk is also a factor reflecting the prominent role that the two principal shareholders, brothers Charles and David Koch, have played in developing the culture and financial policies of KII. However, Moody's understands that KII has devoted considerable planning to de-risking management and ownership succession.

FHR's A1 long-term rating reflects the profitability of its efficiently-run, large-scale refining operations, its strong capitalization and liquidity, and its strategic importance to KRLLC. FHR is the highest-rated issuer within Moody's independent refining and marketing peer group, operating two large-scale refineries that have been industry leaders in profitability through the refining cycle. Disciplined financial policies underpin the ratings, which factor in a sizable equity base, low financial leverage, and a flexible dividend policy. FHR's stand-alone credit profile is more indicative of a high Baa-rated refining company, given its exposure to the cyclical, margin based refining business, its smaller scale and limited operational diversity compared to its larger refining peers. However, FHR's A1 long-term rating reflects uplift from its strategic importance to its parent, KRLLC. Although KRLLC does not guarantee FHR's debt or its counterparty obligations, we view KRLLC's A1 credit quality, regardless of the one-notch downgrade, and strong governance structure as providing implicit support for FHR's A1 rating. FHR now generates on average over three-quarters of KRLLC's consolidated EBITDA, as well as sizable free cash flow, which is distributed to KRLLC in the normal course after its own capital spending requirements are funded. Consequently, low financial leverage and a flexible dividend policy provide key support for FHR's rating.

Moody's regards KII's liquidity as excellent, and holds the company's financial policies in high regard. Excess liquidity will be consolidated at KII, funded by cash dividends from its subsidiary companies, including KRLLC. Across the KII enterprise, consolidated capital needs are modest, with liquidity characterized by positive free cash flow in excess of capital spending, dividend flexibility that supports high levels of capital retention and sizable cash balances accumulated from internal cash flow and periodic asset sales. Supplementing its cash liquidity, KII's short-term investment portfolio is regarded as highly liquid and concentrated in high quality assets. KII believes that investments in securities and physical positions that comprise this portfolio can be liquidated in less than 90 days. Moody's expects that KII's liquidity position is likely to exceed consolidated debt levels, possibly substantially so. KII has entered into a new, five-year $4.0 billion committed bank credit facility that will support its new $8.0 billion commercial paper program. KII expects to issue commercial paper to fund any short-term liquidity needs of its subsidiary companies under their respective credit facilities with KII. KII's credit facility contains no material adverse change (MAC) provisions nor financial covenants, and provides for same day availability for the full $4.0 billion facility amount. Given the lack of full revolver backstop of KII's commercial paper program, Moody's expects KII to manage commercial paper outstandings so that maturities do not exceed revolver availability.

KRLLC continues to demonstrate a strong liquidity position. The company's internal capital needs are modest, with liquidity characterized by consistently positive cash flow generation in excess of capital spending. KRLLC's existing $3.0 billion committed bank credit facility and its $6.0 billion commercial paper program will be terminated following the closing on its new $2.0 billion five-year committed credit facility provided by KII. Moody's hold's KRLLC's and KII's financial policies in high regard.

KII's stable outlook reflects its conservative financial policies, its low debt levels, diversified asset base and its highly disciplined operating principles. The prospect of a rating upgrade for KII is limited given the present composition of its company holdings. However, rating upgrades among its subsidiary companies or a significant expansion of scale and further diversity in KII's asset mix with low cash flow volatility could prompt the consideration of an upgrade. Ratings could be downgraded if KII does not to sustain a net debt-free position, or takes actions indicative of a less conservative financial policy.

The outlook is stable reflecting KRLLC's conservative financial policies, its low debt levels, diversified asset base and highly disciplined operating principles. A rating upgrade is limited by KRLLC's overall smaller scale and higher business risk relative to higher-rated peers in the energy sector and other larger non-financial corporate issuers. However, a significant expansion of scale and further diversity in asset mix with lower cash flow volatility could prompt consideration of an upgrade. KRLLC's ratings could be downgraded if there is a change to a more permanently leveraged capital structure, indicative of a less conservative financial policy, or should refining margins erode jeopardizing the company's positive free cash flow operating profile.

FHR's stable outlook is consistent with the stable rating outlook of KRLLC. A rating upgrade is unlikely given the inherent volatility and operating risks of the refining industry and the company's smaller scale compared to its rated peers. FHR's ratings could be downgraded should there be a subsequent downgrade of KRLLC's ratings.

Headquartered in Wichita, Kansas, Koch Industries, Inc. is a privately held company engaged across a multitude of industries through its five subsidiary companies and an equity development portfolio.

The principal methodology used in rating Koch Industries, Inc. was Investment Holding Companies and Conglomerates published in December 2015. The principal methodology used in rating Flint Hills Resources, LLC., Koch Resources, LLC, Corpus Christi (Port) TX, Auth of Nueces Cnty, and Nueces (Cnty of) Tx, Port of Corpus Christi was Refining and Marketing Industry published in November 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Andrew Brooks
VP - Senior Credit Officer
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.
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