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Related Issuers
Rating Action:

Moody's rates HollyFrontier's new unsecured notes Baa3

14 Sep 2020

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 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.

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

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.

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:
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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CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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​
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