TEXT-S&P rates Calumet Specialty Products notes 'B'

Thu Jun 21, 2012 5:09pm EDT

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. Use the Ratings search box located in the left 
column.
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