New York, July 09, 2020 -- Moody's Investors Service (Moody's) assigned a B1 rating to Calumet Specialty
Products Partners, L.P.'s (Calumet) proposed senior
secured first lien notes due 2024. The existing ratings were affirmed,
including the B3 Corporate Family Rating (CFR), B3-PD Probability
of Default Rating and the Caa1 ratings on the existing senior unsecured
notes. The Speculative Grade Liquidity Rating was downgraded to
SGL-3 from SGL-2. The rating outlook is stable.
The proposed $200 million senior secured first lien notes are being
offered as part of an exchange at par for $200 million principal
amount of senior unsecured notes due 2022.
"Calumet's proposed debt exchange will extend the maturity of $200
million of notes, leaving $150 million of notes to be refinanced
prior to the January 2022 maturity," stated James Wilkins,
Moody's Vice President. "The company's leverage will
be unchanged as a result of the exchange transaction."
The following summarizes the rating activity.
Downgrades:
..Issuer: Calumet Specialty Products Partners,
L.P.
.... Speculative Grade Liquidity Rating,
Downgraded to SGL-3 from SGL-2
Assignments:
..Issuer: Calumet Specialty Products Partners,
L.P.
....Senior Secured First Lien Notes,
Assigned B1 (LGD2)
Affirmations:
..Issuer: Calumet Specialty Products Partners,
L.P.
.... Probability of Default Rating,
Affirmed B3-PD
.... Corporate Family Rating, Affirmed
B3
....Senior Unsecured Notes, Affirmed
Caa1 (LGD4)
Outlook Actions:
..Issuer: Calumet Specialty Products Partners,
L.P.
....Outlook, Remains Stable
RATINGS RATIONALE
The proposed senior secured first lien notes are rated B1, two notches
higher than the B3 CFR, reflecting the secured notes higher priority
claim on assets than borrowings under the unsecured notes. The
secured notes have a first lien on substantially all the assets of Calumet
and subsidiary guarantors other than assets securing the ABL revolving
credit facility (accounts receivable, inventory, cash and
the Great Falls refinery). Moody's believes the B1 ratings on the
secured notes are more appropriate than the ratings suggested by Moody's
Loss Given Default (LGD) methodology. The unsecured notes are rated
Caa1, one notch below the B3 CFR, reflecting their lower priority
claim on assets compared to the secured revolver and notes. Calumet's
balance sheet debt (as of March 31, 2020, and pro forma for
the proposed debt exchange), includes the secured ABL revolving
credit facility, the proposed senior secured first lien notes and
three existing unsecured notes issues totaling $1.0 billion.
The rapid spread of the coronavirus outbreak, deteriorating global
economic outlook, low oil prices, and high asset price volatility
have created an unprecedented credit shock across a range of sectors and
regions. Moody's regards the coronavirus outbreak as a social
risk under its ESG framework, given the substantial implications
for public health and safety. The affirmation of Calumet's
CFR reflects the impact on the company of the deterioration in credit
quality it has triggered, given its exposure to US refined products
and specialty chemicals, which has left it vulnerable to shifts
in market demand and sentiment in these unprecedented operating conditions.
Calumet's B3 CFR reflects its modest scale, elevated leverage and
generally improving operating performance, but history of inconsistent
free cash flow generation. The company generated negative free
cash flow of $35 million in the first quarter 2020 when working
capital was a large use of cash due to the sharp decline in oil and refined
products commodity prices. However, Moody's expects
that to be reversed as oil prices revert to higher levels and demand for
refined products recover. The company has reduced its leverage
(4.0x Debt to EBITDA as of March 31, 2020, including
Moody's analytical adjustments) by retiring debt and open market purchases
of notes as well as by growing earnings. Moody's expects Calumet
to further improve profit margins, generate more consistent positive
free cash flow and further improve its credit metrics. The company
has been restructuring its operations through implementation of self-help
projects, divesting non-core assets, and spending on
opportunistic growth capital projects. In 2020, the company
announced it is reviewing strategic options for its Great Falls,
Montana refinery. The company benefits from geographic diversity
of operations, a diverse customer base (no customer represents ten
percent or more of revenues) and its numerous specialty products (some
of which are recognized brands) offer exposure to diverse end markets.
Calumet's SGL-3 Speculative Grade Liquidity rating reflects its
adequate liquidity profile, supported by availability under the
ABL revolving credit facility, cash balances ($105 million
as of June 30, 2020) and operating cash flow that should cover its
capital expenditures. The company has inventory financing agreements
related to its two largest refineries (Great Falls and Shreveport) that
mature in June 2023. The asset based revolver commitments total
$600 million and it had a borrowing base of $279 million,
and availability of $140 million as of June 30, 2020,
after accounting for outstanding borrowings and letters of credit.
The borrowing base declined in the first half 2020 with the decline in
oil commodity prices and will likely rise as commodity prices recover.
However, the $99.6 million that was added to the borrowing
base in October 2019 to reflect the fixed assets of the Great Falls,
MT refinery amortizes on a straight line basis over ten quarters starting
in the first quarter 2020.
The next debt maturity is the remaining $150 million of unsecured
notes due in January 2022 and following that $325 million of notes
are due in April 2023. The revolver has one springing financial
covenant which currently provides that only if availability under the
facility falls below the sum of the FILO loans plus the greater of:
(i) 15% of the Borrowing Base (10% when the fixed assets
of the Great Falls, MT refinery are no longer in the borrowing base);
and (ii) $35 million, the company is required to maintain
a Fixed Charge Coverage Ratio of at least 1.0 to 1.0 as
of the end of each fiscal quarter. The conditions for when the
springing covenant is tested change upon the effectiveness of the revolver
amendment.
The stable rating outlook reflects Moody's expectation that the company's
earnings will improve as the US demand recovers and it will refinance
the balance of the notes due January 2022 well before the maturity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Calumet consistently generates positive
free cash flow, maintains retained cash flow to debt above 10%
and leverage (debt / EBITDA) consistently below 4x, and refinances
the notes due 2022. The ratings could be downgraded if the company
does not refinance its notes due 2022 well before the maturity date,
it generates negative free cash flow, leverage is expected to be
above 6x or liquidity declines.
The principal methodology used in these ratings was Refining and Marketing
Industry published in November 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1040610.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Calumet Specialty Products Partners, L.P., headquartered
in Indianapolis, Indiana, is an independent North America
producer of specialty hydrocarbon products, such as lubricants,
solvents and waxes, and fuel products. It is structured as
a publicly traded Master Limited Partnership (MLP). Calumet operates
two business segments: Specialty Products and Fuel Products.
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
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
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am Main 60322, Germany, in accordance with Art.4 paragraph
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James Wilkins
Vice President - Senior Analyst
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
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