TEXT-S&P rates Calumet Specialty Products notes 'B'
Overview -- Indianapolis-based energy company Calumet Specialty Products Partners is acquiring high-performance lubricant manufacturer Royal Purple Inc. (not rated) for about $335 million. -- We are affirming our 'B' corporate credit rating on Calumet. We are also assigning our 'B' issue rating and a '4' recovery rating to the partnership's $275 senior unsecured notes. -- The stable outlook reflects our view that Calumet will continue to generate mainly stable cash flows in 2012 with debt to EBITDA of around 4x. Rating Action On June 21, 2012, Standard & Poor's Ratings Services affirmed its 'B' corporate credit and senior unsecured debt ratings on Calumet Specialty Products Partners L.P., a master limited partnership (MLP) focused on the energy sector, pursuant to the partnership's acquisition of Royal Purple Inc. The rating outlook is stable. At the same time, we assigned a 'B' issue rating and a '4' recovery rating to the $275 million senior unsecured notes due 2020. The 'B' rating on the notes and '4' recovery rating indicate our expectation that lenders would receive average recovery (30% to 50%) if a payment default occurs. The partnership intends to use net proceeds from this offering to fund a portion of the Royal Purple Inc. acquisition. It will use the remaining amounts for general partnership purposes. Rationale The ratings on Indianapolis-based Calumet reflect Standard & Poor's view of its volatile operating margins inherent to the refining industry, the company's elevated debt leverage, and still limited scale of operations following the Superior refinery acquisition. In addition, Calumet's discretionary cash flows are limited due to its MLP structure. The emphasis to maintain or grow distribution levels limits credit quality when operating margins and cash flows are low, such as 2009. Nevertheless, ratings benefit from Calumet's significant production of typically higher-margin specialty products, improved near-term market conditions, and improved asset and market diversity following the Superior acquisition. Calumet's purchase of Royal Purple expands the company's packaging and branded products business along with previous acquisitions of the TruSouth/TruFuel and Hercules assets. We expect Royal Purple's cash flows can grow by 15% to 20% over the next few years, in line with previous numbers. Royal Purple gets most of its cash flows from producing and selling high-performance lubricants for automotive, industrial, and marine uses and racing operations. Calumet's financial performance will continue to vary, given the inherent volatility of refining margins. Despite improved industry fundamentals on fuel margins during the first nine months of 2011, Calumet's entire gross margin stemmed from the specialty products business, $23.52 per barrel, reflecting unfavorable hedge positions on fuel products. Although gross margins on fuels improved to $3.01 per barrel during the third quarter, year-to-date results remained weak at only 1 cent per barrel. We expect fuel margins to improve following the acquisition of the Superior refinery from Murphy Oil Co. given its advantaged location in the PADD II region of the Midwest. As of March 31, 2012, adjusted debt leverage was about 3.6x following the Superior refinery acquisition. However, pro forma for this debt issuance, we expect debt leverage to increase to about 4.2x, declining to about 3.8x by year-end 2012, reflecting the added production and revenue from the acquisition. At the same time, we expect adjusted interest coverage to be about 3.5x by the end of the year. Calumet's business risk profile is "weak" (as our criteria define the term). Although the addition of the Royal Purple business lines and the recent acquisition of the Superior refinery adds some market and asset diversity, Calumet still lacks the scale and asset diversity of larger peers, with a total throughput capacity of 135,000 barrels per day (bpd), and the bulk of capacity focused at its Shreveport, La. plant (60,000 bpd) and the Superior refinery (capacity up to 45,000 bpd depending on feedstocks). This concentration offsets modest diversification, which its four much smaller plants provide: Cotton Valley, La. (13,500 bpd), Princeton, La. (10,000 bpd), Karns City, Pa. (5,500 bpd), and Dickenson, Texas (1,300 bpd). Calumet's significant production of specialty products sets it apart from peers. For the quarter ended March 31, 2012, about 50% of the company's total revenues consisted of specialty products, and accounted for about 80% of gross profits. The specialty products market includes base oils, bright stock, waxes, and solvents, used for products such as adhesives, gear lubricants, motor oils, automatic transmission fluids, paints, and candles. The Superior refinery should bring a better balance between fuels and specialty products, allowing Calumet to better capture market peaks such as had occurred in 2011. To add specialty products capacity, in October 2009, Calumet entered into a marketing agreement with Houston Refining L.P. (a wholly owned subsidiary of LyondellBasell Finance Co. Ltd.). Calumet markets 3,000 bpd of naphthenic lubricating oil produced at Houston Refining, and Houston Refining processes 800 bpd white mineral oil for Calumet. The agreement runs through Oct. 31, 2014. Liquidity We currently assess Calumet's liquidity as "adequate". In conjunction with the Superior acquisition, Calumet exercised the $300 million expansion option under its revolving credit facility to increase the maximum availability of credit to $850 million. Currently, Calumet had availability under its revolving credit facility of about $375 million, based on a $550 million borrowing base. We expect cash balances to remain minimal given its MLP structure and associated distribution of most free cash flows. Our assessment of Calumet's liquidity profile incorporates the following expectations and assumptions: -- Stronger specialty margins should continue to buffer weaker margins in the company's fuel segment. -- Likelihood of increased working capital needs resulting from the Superior acquisition. -- No near-term debt maturities--$850 million credit facility matures in 2013 and $600 million senior notes are due 2019. -- Capital spending of about $60 million and expected distributions of $125 million in 2012 also constitute uses of liquidity Although Calumet has been able to offset weak margins on fuels with stronger returns on its specialty products, a fall in demand for products or sharp rise in crude oil costs could erode cash flows and liquidity. In addition, Calumet has to maintain a fixed-charge coverage ratio of 1.0x if availability under the revolving credit facility falls below $67 million, as defined in the company's credit agreement. The credit facility's borrowing base is determined based on advanced rates of percentages of eligible accounts receivable and inventory, which we consider a weakness in its liquidity profile because liquidity could be impaired if the prices of products and crude oil decline significantly. Recovery analysis The issue-level rating on Calumet's senior unsecured notes is 'B'. The recovery rating is '4' indicating our expectation for average (30% to 50%) recovery if a payment default occurs. (For recovery analysis on Calumet, see the recovery report to be published shortly on RatingsDirect). Outlook The outlook is stable. We expect Calumet to maintain adequate liquidity and to continue to benefit from solid specialty product margins, as well as the addition of the Royal Purple acquisition and the Superior, Wis. refinery. We could lower ratings if adjusted debt leverage exceeds 4.5x for a prolonged period. At this time, we do not expect any positive rating actions on the company, given its limited scale of operations, elevated debt leverage, and continued doubts on the longer term sustainability of beneficial market conditions. Related Criteria And Research -- Key Credit Factors: Criteria For Rating The Global Oil Refining Industry, Nov. 28, 2011 -- Principles Of Credit Ratings, Feb. 16, 2011 Ratings List Ratings Affirmed Calumet Specialty Products Partners L.P. Corporate credit rating B/Stable/-- Calumet Specialty Products Partners L.P. Calumet Finance Corp. Senior unsecured B Recovery rating 4 New Ratings Calumet Specialty Products Partners L.P. Calumet Finance Corp. $275 mil. senior unsecured notes B Recovery rating 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. 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