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Rating Action:

Moody's assigns B1 rating to Calumet Specialty Products' senior secured notes

09 Jul 2020

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 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 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 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.

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.

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
Client Service: 1 212 553 1653

No Related Data.
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