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Global Credit Research - 13 Jul 2010
Approximately $450 million of debt securities affected
New York, July 13, 2010 -- Moody's Investors Service assigned a B3 rating the notes offering
by Calumet Specialty Products Partners, L.P. (Calumet).
Moody's is also assigning a B2 Corporate Family Rating CFR,
B2 Probability of Default Rating (PDR), and a SGL-3 Speculative
Grade Liquidity Rating. The outlook is stable.
The new notes are being issued by Calumet, the publicly traded Master
Limited Partnership (MLP). The new notes will be used to refinance
the existing senior secured credit facilities at Calumet Lubricants Company,
L.P. (Lubricants)the operating company for Calumet.
As a result, the new ratings are being assigned to Calumet and the
B2 CFR, B3 PDR, and ratings at Lubricants will be withdrawn
at close of this financing.
Under Moody's Loss Given Default methodology, the new notes
are rated one-notch below the CFR due to the new $375 million
senior secured credit facility (with an expected borrowing base of about
$220 million) that will be in place at close of the notes offering.
While the new senior secured credit facility will remain at Lubricants,
the new notes being issued by Calumet will be guaranteed by Lubricants.
The B2 CFR reflects the inherent volatility of the company's transportation
fuels and specialty products businesses juxtaposed with the distribution
needs of the MLP model and the increased pro-forma debt levels.
Although the specialty products business tends to be more durable than
the fuels business, the demand for specialty products tracks the
overall economy and is therefore, subject to cyclical swings.
The fuels business is particularly volatile and the margins in that business
can fall significantly as it did in 2009, when gross profit for
that business fell by more than 50%. Given that the business
represents roughly half of the total throughput capacity for Calumet,
it can have a significant impact on consolidated earnings and cashflows.
This can ultimately affect Calumet's ability to continue to meet
the ongoing distribution requirements to the MLP common unit holders as
it did in 2008, when the company cut its unit distributions due
to cashflow volatility.
After reducing debt from its historically high point after the Penreco
acquisition in 2008, debt is increasing to its near historical high
point with this refinancing. As a result, pro forma leverage
(adjusted Debt/EBITDA) is increasing from 5.0x at 3/31/10 to about
5.8x. This leverage trend is up from 2009 due to weaker
fuels margins and rising crude costs which caused specialty products margins
to tighten, highlighting the volatility of its earnings and cashflows.
Given the long-term nature of this debt, the company is more
exposed to the inherent volatility of the business and could result in
tighter financial flexibility in periods of weaker margins.
The B2 also considers Calumet's niche position within the specialty
products industry and the degree of cash flow durability this business
provides relative to its transportation fuels business. As a leading
independent niche producer of specialty lubricants, solvents,
and waxes, Calumet is capable of producing a wide variety of specialty
products that meets varying customer's needs.
This business also lends itself to more durable margins over time as the
company can push through price increases to keep pace with rising feedstock
costs, though with some time lag. For FY 2009, this
business generated approximately 80% of the consolidated gross
margin, providing a higher degree of stability to the consolidated
earnings and cashflows.
The stable outlook assumes that the demand for specialty products will
increase as the economy improves, resulting in increased EBITDA
with leverage trending back to under 4.0x by year-end 2010.
The stable outlook also assumes that distributions are kept at levels
that are supportable by internal cashflows, keeping debt levels
near current levels.
The SGL-3 rating reflects the expectation that Calumet will have
sufficient liquidity over the next twelve months to meet its minimal capital
spending requirements, interest expense, working capital needs,
and MLP common unit distributions.
The last rating actions for Calumet was on December 3, 2007,
when Moody's assigned ratings to the company's credit facilities
for Calumet Lubricants Company, L.P.
The principal methodology used in rating Calumet Specialty Products Partners,
L.P. was Moody's Global Independent Refining and Marketing
rating methodology, published in December 2009 and available on
www.moodys.com in the Rating Methodologies sub-directory
under Research & Ratings. Other methodologies and factors that
may have been considered in rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
Calumet Specialty Products Partners, L.P. is headquartered
in Indianapolis, Indiana.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Moody's rates Calumet's new notes B3
No Related Data.
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