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Rating Action:

Moody's rates Alon USA Energy's new term loan B2

17 Oct 2012

Approximately $667 million of rated debt securities affected

New York, October 17, 2012 -- Moody's Investors Service assigned a B2 rating to Alon USA Energy, Inc's (ALJ) proposed $450 million term loan due 2018. Simultaneously, Moody's affirmed with a stable outlook ALJ's B2 Corporate Family Rating (CFR) and changed its Speculative Grade Liquidity rating to SGL-2 from SGL-3. In a related action, Moody's placed Alon Refining Krotz Spring, Inc.'s (ARK) B2 CFR and B2 senior secured notes rating under review for downgrade.

Issuer: Alon Refining Krotz Springs, Inc.

..Downgrades:

....US$216.5M 13.5% Senior Secured Regular Bond/Debenture, Downgraded to a range of LGD3, 49 % from a range of LGD3, 45 %

..On Review for Possible Downgrade:

.... Probability of Default Rating, Placed on Review for Possible Downgrade, currently B2

.... Corporate Family Rating, Placed on Review for Possible Downgrade, currently B2

....US$216.5M 13.5% Senior Secured Regular Bond/Debenture, Placed on Review for Possible Downgrade, currently B2

Issuer: Alon USA Energy, Inc.

..Upgrades:

.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3

..Assignments:

....US$450M Senior Secured Bank Credit Facility, Assigned B2

....US$450M Senior Secured Bank Credit Facility, Assigned a range of LGD4, 51 %

ALJ has proposed to establish a variable distribution master limited partnership (MLP) of Alon USA Partners, LP (ALP), comprising its Big Spring, Texas refinery and associated logistics assets. Subsequently, ALP's shares would be offered in an initial public offering (IPO). ALJ has established the parameters and the structure of the proposed MLP in the Form S-1/A filed with the SEC on Oct 5, 2012. Proceeds from the new term loan will be used to repay ALJ's $423 million of outstanding indebtedness under its existing loan agreement due in June 2013 and for general corporate purposes. The term loan will originally be secured by a first lien on all of ALJ's physical assets and a second lien on its working capital, with the exception of the restricted subsidiaries that own and operate the Krotz Spring's refinery in Louisiana and the retail operations in the Southwest US. After the IPO, ALP will assume $250 million of the principal amount of the new term loan, with the remaining $200 million expected to be repaid with the proceeds from the IPO. The $250 million ALP term loan will be secured by a first lien on all of ALP's physical assets and second lien on its working capital. Following the MLP IPO, ALJ is expected to own the general partner of ALP, Alon USA Partners GP, LLC and approximately 80% of ALP's common LP units, and ALP will cease to be a guarantor of ALJ's liabilities.

If the anticipated scenario of the IPO of ALP materializes, Moody's expects to withdraw ALJ's B2 CFR; assign ALP a B2 CFR and a B2 rating to its $250 million term loan; and potentially downgrade ARK's B2 CFR and secured note rating to B3.

"While Alon's expected use of ALP's IPO proceeds to reduce leverage is credit positive, the increased structural complexity and high payout MLP model being adopted constrains ALJ's Corporate Family Rating at B2," commented Gretchen French, Moody's Vice President. "In addition, the impending MLP formation will leave the weaker performing assets and the rated debt associated with them, including Krotz Springs Refining and ALJ's California properties, at a structural disadvantage without the potential direct support from all of the cash flows from the Big Spring refinery, which represents the largest source of ALJ's consolidated cash flow."

RATINGS RATIONALE

ALJ's B2 CFR reflects the company's small scale but yet diversified portfolio of refining and marketing assets and the inherent volatility and capital intensity of the refining sector. The rating is supported by the Big Spring refinery's proven operational track record and favorable geographic location. The Big Spring refinery, which is ALJ's main refining asset, has access to discounted WTI crude and local WTS supply and is well positioned within a product short region, resulting in strong margins over the last twelve months. We believe that ALJ's crude sourcing differentials will continue to remain supportive, but will begin to narrow over the next several years as increased take away capacity comes on stream. The CFR also benefits from ALJ's integrated owned/operated retail network, which provides an estimated $50 million per year durable cash flow. The rating is restrained by the lower complexity of the Krotz Springs refinery and its recent weak profitability and low utilization due to lack of access to cheaper crude sources. ALJ has recently provided the Krotz Springs refinery with 25,000 barrels per day of discounted WTI crude supply through a pipeline from Midland, Texas, which has returned the refinery back to profitability. The Krotz Springs refinery is still expected to run below its name plate 83,000 bbls/day capacity due to lack of economical supply.

ALJ's stable outlook assumes that the company will continue to demonstrate consistent operating performance and remain moderately leveraged on a fully consolidated basis. The stable outlook also assumes that all future acquisitions and major growth capital expenditures are adequately funded with equity.

ARK's B2 CFR was placed under review for downgrade in anticipation of the ALP IPO and the uncertainty regarding future debt levels at ARK, as any ALP's IPO proceeds in excess of $200 million are expected to be used to repay debt at ARK. The review for downgrade reflects the single refinery risk to the stand-alone debt holders, the erosion of potential direct cash flow support due to the pending drop down of the Big Spring refinery in the ALP MLP and concern that despite improvements, profitability and utilization levels will continue to be constrained relative to potential debt levels.

Under Moody's Loss Given Default Methodology (LGD), the new term loan is rated B2, equal to ALJ's CFR. The B2 senior term loan rating reflects both the overall probability of default rating (PDR) of B2 and a loss given default of LGD4 - 51%. ARK's secured notes are currently rated B2, LGD3 -- 49%. The new ALJ term loan and subsequently ALP term loan will be secured by the property plant and equipment of the Big Spring refinery. The loan has a second lien on working capital, while the revolving credit facility has the first lien on the working capital. ARK's secured notes have a first lien on the Krotz Springs collateral, whereas the J. Aron supply and offtake agreement has a first lien on the Krotz Springs working capital. In the event of a distressed situation, the term loan and secured notes creditors will need to rely on the intrinsic value of refineries that operate in very competitive markets . A ready buyer cannot be assured. It is for that reason that we consider asset recovery for the term loan and secured notes to be inferior to that of Alon's revolving credit facility and the J. Aron supply and offtake agreement at ARK. Hence, we have incorporated a deficiency assumption for recovery in our LGD analysis for the term loan and the secured notes ratings.

ALJ's SGL-2 Speculative Grade Liquidity Rating reflects an adequate liquidity profile. ALJ's liquidity profile is constrained by the volatility and cyclicality of the refining business. In 2013, Moody's expects that ALJ's internally generated cash flow will cover maintenance spending at approximately $68 million per annum and turnaround expenditures at estimated $14 million per annum. As of June 30, 2012 the company had $58 million cash on its balance sheet and $39 million of availability under its $240 million secured revolving credit facility, which matures in March 2016. As of June 30, 2012 ALJ was in compliance with all maintenance covenants. We expect ALJ will remain in compliance with its financial covenants, thus ensuring accessibility to its revolving credit facility.

Alon's liquidity is enhanced by a supply and logistics agreement whereby J. Aron funds the purchase of crude for the both the Big Spring and Krotz Springs refineries. This arrangement accounts for almost all of the refineries' crude supply. We believe there is little concern these agreements will be canceled by either party in the near term but if they were, substantial inventory would need to be financed by ALJ, in a reasonably short time. This arrangement implies that uncommitted but traditional sources of capital such as bank revolving credit facilities and trade credit would be readily available to finance the core assets as they move back on balance sheet. Alternate liquidity is limited given that substantially all of the company's assets are pledged.

We could upgrade ALJ's CFR if the company increases its diversification of cashflows by adding more profitable assets without significantly increasing leverage or decreasing returns on capital employed. We could downgrade ALJ's CFR if financial leverage increases materially due to an acquisition or as a result of debt funded distributions or share buybacks, or if there is a prolonged and severe deterioration of regional refining conditions, or if liquidity deteriorates.

The principal methodology used in rating ALJ and ARK was the Global Refining and Marketing Industry Methodology published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Alon USA Energy, Inc. is headquartered in Dallas, Texas.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Gretchen French
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's rates Alon USA Energy's new term loan B2
No Related Data.
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