New York, September 14, 2020 -- Moody's Investors Service ("Moody's") assigned
Baa3 ratings to HollyFrontier Corp.'s (HFC) proposed senior
unsecured notes due in 2023 and in 2030. HFC's unsecured
debt issuance will primarily be used to pre-fund capital spending
pertaining to its planned renewable diesel projects. HFC's
other ratings and negative outlook remain unchanged.
"While HollyFrontier's renewable diesel projects will modestly diversify
its business profile and improve its ESG profile over time, this
financing transaction will increase HollyFrontier's debt and weaken
its leverage profile," said Arvinder Saluja, Moody's Vice
President. "However, the debt increase was anticipated and
is incorporated in the company's negative rating outlook."
Assignments:
..Issuer: HollyFrontier Corp.
....Senior Unsecured Notes, Assigned
Baa3
RATINGS RATIONALE
HFC's Baa3 unsecured rating reflects the company's long track record of
conservative financial policies with historically low leverage,
financial performance that has been one of the strongest in the refining
industry and its complementary logistics capability. The rating
is also supported by the strategic location of HFC's refining assets,
which allows for access to advantaged crudes. HFC's rating is restrained
by its limited scale. The rating considers the challenges facing
the refining industry over the longer term, including potential
changes in market dynamics, and risk associated with regulatory
capital expenditures that may not produce any additional cash flow.
Moody's expects HFC to maintain supportive consolidated leverage
metrics, including Holly Energy Partners L.P. (HEP,
Ba2 stable), over the cycle despite potential EBITDA volatility,
manage its share buybacks in a conservative and measured manner,
and use its sizeable balance sheet cash prudently.
HFC's negative rating outlook reflects the higher debt level which
will worsen credit metrics amidst challenging refining industry conditions,
and the possible execution risk regarding the development of the renewable
diesel projects.
Moody's expects that post-completion, the renewable
projects will produce enough renewable diesel to considerably reduce HFC's
RIN expenses, which have been volatile for merchant refiners over
the past few years. The projects will allow some diversification
from traditional fuels refining, although they reduce HFC's
already modest refining footprint by over 50,000 bpd (>10%)
of crude distillation capacity as it re-purposes its Cheyenne asset
to only produce renewable diesel. In addition, HFC's
renewable diesel will be transported to California, where a state-specific
program, LCFS (Low Carbon Fuel Standard) Program, will allow
it to enhance its projects' returns by receiving LCFS credit value.
LCFS credits could fluctuate in value over time, especially as the
industry-wide supply of renewable diesel increases. Even
though the contemplated pre-treatment unit will give HFC some feedstock
flexibility for renewable diesel production, HFC will likely be
largely exposed to soybean oil, which has a higher carbon intensity
than other non-agricultural feedstocks such as used cooking oil.
Despite their still potentially solid IRRs, we view these projects
to be a step-out transaction due to HFC's history as a traditional
fuels refiner. As such, there is some execution and integration
risk associated with them, along with a significant increase in
HFC's dependence on regional regulatory regimes for lowering carbon intensity
in the transportation fuels pool. In addition, inclusive
of the proposed debt, HFC's consolidated leverage metrics will get
stretched in the near term due to the severe down-cycle in its
primary refining business.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's expects that improving refining margins after 2020 and earnings
contributions from the renewable projects starting in 2022 will allow
HFC to maintain supportive over-the-cycle consolidated leverage
metrics for its Baa3 ratings. A downgrade could result if refining
margins do not look likely to improve meaningfully beyond 2020,
if HFC's strategy and financial policies were to become less conservative,
or if HFC were to experience material operational issues or construction
issues for the projects.
An upgrade for HFC is unlikely in the near term due to HFC's modest scale.
If the company grows through acquisitions and meaningfully increases its
asset diversity, while maintaining its conservative financial profile,
then an upgrade may be considered.
Headquartered in Dallas, Texas, HollyFrontier Corporation
is an independent US refining company.
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.
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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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
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issued on a support provider, this announcement provides certain
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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
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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.
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.3437130
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for additional regulatory disclosures for each credit rating.
Arvinder Saluja, CFA
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:
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