TEXT-S&P revises GreenField Ethanol outlook to negative

Overview
-- We are revising our outlook on GreenField Ethanol Inc. to negative
from stable.
-- At the same time, we are affirming our 'B+' long-term corporate credit
rating on the company.
-- The negative outlook reflects our concerns of refinancing risk related
to GreenField's debt maturity in January 2014 and our expectations of
declining headroom under the covenants in 2013.
-- There is also significant execution risk related with the company's
capital expenditure on several new projects to offset declining EBITDA
contributions from government subsidies.

Rating Action
On July 27, 2012, Standard & Poor's Ratings Services revised its outlook on
Toronto-based ethanol producer GreenField Ethanol Inc. (GFE) to negative from
stable. At the same time, Standard & Poor's affirmed its 'B+' long-term
corporate credit rating on the company.

The negative outlook reflects our concerns of refinancing risk related to
GreenField's debt maturity in January 2014 and declining headroom under the
covenants in 2013. There is also significant execution risk related with the
company's capital expenditure on several new projects to offset declining
EBITDA contributions from government subsidies.

Rationale
The rating on GFE reflects Standard & Poor's view of the company's weak
business risk profile and aggressive financial risk profile. GreenField relies
on government subsidies for a significant (about 70%) amount of its EBITDA
generation and we expect these subsidies to start declining at the end of
2012, stopping by the end of 2016. Furthermore, the company is exposed to
commodity price volatility in its ethanol business, and faces hedging risks
associated with its commodity risk. Standard & Poor's believes that offsetting
these weaknesses somewhat are GFE's long-term customer contracts within its
fuel ethanol business, and strong market positions within the Canadian fuel
ethanol and North American industrial alcohol industry.

GFE produces industrial and beverage alcohol, fuel ethanol, and distillers'
grains that it sells largely to North American customers. The company's four
manufacturing plants are in Ontario and Quebec and are capable of producing
more than 600 million liters of fuel ethanol and industrial alcohol per year.
GFE sells about 75% of its total production as fuel ethanol to Ontario- and
Quebec-based oil refiners. Its beverage and industrial alcohol business
operates three alcohol packaging plants based in Canada and the U.S., serving
more than 6,000 customers.

Standard & Poor's considers GFE's business risk profile to be weak. The
company's profitability depends highly on government subsidies for ethanol. We
expect ethanol segment EBITDA to decline significantly in the coming years as
these subsidies end. For instance, the company's Johnston, Ont., plant will
receive reduced subsidies at the end of 2012 and it expects subsidies for all
facilities to end by the end of 2016. To mitigate this, we expect GFE to take
several projects mostly related on improving plant efficiencies. However,
these projects will not provide incremental EBITDA till 2014-2015 and face
execution risk.

The company faces significant commodity risk related to the market-based
pricing mechanisms on its fuel ethanol contracts. Its operating performance
execution is contingent upon GreenField managing these commodity risks. Its
fuel ethanol production is priced off of ethanol and gasoline price indexes,
so GFE is exposed to basis risk due to the fluctuating relationship between
its key input cost (corn) and output values (ethanol and gasoline). We view
the company's core business of fuel ethanol production as having a high degree
of customer concentration, as nearly all of its fuel ethanol is sold to
several Canadian oil refiners. Somewhat offsetting GFE's high customer
concentration are relatively long-term, take-or-pay contracts, and the
operational efficiencies associated with its plants being near its corn
suppliers and ethanol off-takers.

While the company's hedging program would protect near-term margins somewhat,
it still relies significantly on dependable correlations between its key
inputs and outputs. Moreover, the program's effectiveness in hedging at least
a portion of GreenField's commodity risk is contingent upon the continued
ability and willingness of a small group of counterparties to execute some
rather illiquid financial derivative contracts.

GFE enjoys some diversification from its bulk industrial alcohol business. The
company has about an 80% market share of the Canadian industrial alcohol
market as well as a small-but-stable position within the U.S. Industrial
alcohol generally sells at a premium to fuel ethanol, and acts as a moderate
counterweight to periodically weaker fuel ethanol crush margins.

GFE's financial risk profile is aggressive, in our view. The company has
reduced debt and current Standard & Poor's-adjusted debt is slightly above
C$300 million. Standard & Poor's adjusted debt-to-EBITDA ratio is 3.0x-3.5x,
and we expect it to remain in this range in the near term.

Our base case expectations are as follows:
-- We expect revenues to decline at approximately 5% annually, and EBITDA
margin 10%-13% in the next two years.
-- Subsidies received will decline to slightly more than C$10 million by
2016 from approximately C$70 million in 2012.
-- Growth capital expenditure to be high, but the company will not
realize meaningful incremental EBITDA generation from these projects until
2014-2015.
-- Capital expenditure projects will provide a modest offset to the loss
of EBITDA generated from subsidies.

Cash flow protection levels, as measured by funds from operations
(FFO)-to-debt, are 15%-20% and will remain at 20%-25% in the near term. We
estimate that GFE's free cash flow generation will likely be adequate enough
to help fund the company's growth-oriented capital spending program as well as
repay sizable portions of its term loan.

Liquidity
We consider GreenField's liquidity to be less than adequate based on our
criteria. The company has C$10 million cash on hand and full availability on
its C$30 million revolving credit facility as of June 30, 2012. GFE's most
significant portion of debt is its term loan due January 2014.

Our view of the company's liquidity profile incorporates the following factors
and assumptions:
-- We expect that liquidity sources (including cash, discretionary cash
flow, and revolving credit availability) will exceed 1.2x in 2012.
-- Although we believe that GreenField has flexibility within its capital
spending program to lower annual capex to a maintenance level of approximately
C$7 million, it will need to spend moderately on growth capex beginning in
2013 to mitigate the declining contributions from subsidies.
-- In our assessment, the company has a weak standing in the credit
markets, which could lead to potential refinancing risks on its term debt.
-- We believe that without meaningful EBITDA generation from new
projects, GFE might have low headroom on its leverage covenants beginning in
2013.
-- As per our criteria, we have not given the company credit for its
revolver availability in 2013 because it will mature in 12 months or less.
-- We believe that GFE has a limited ability to absorb high-impact,
low-probability events that could hinder ethanol margins.
-- Cash uses include contractual debt amortization on the company's term
debt, and capex for maintenance and growth projects.

Outlook
The negative outlook reflects our concerns of refinancing risk related to
GreenField's debt maturity in January 2014 and declining headroom under the
covenants in 2013. There is also significant execution risk related with the
company's capital expenditure on several new projects to offset declining
EBITDA contributions from government subsidies.

We could lower the rating if GFE is unable to refinance 2014 debt maturities
by early 2013, covenant headroom declines to below 10%, or the industry
experiences sustained crush spreads of less than 50 Canadian cents per gallon
leading to profitability being lower than our expectations. We do not expect
to revise the outlook to stable in the next year, given declining subsidies
and heavy capital expenditure on new projects that is likely to deteriorate
liquidity. However, we would consider a stable outlook if the company is able
to refinance debt, improve cushion under covenants, fund growth capital
expenditures, and mitigate declining EBITDA with the cash flows from new
projects.

Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Outlook Revised To Negative

To From
Corporate credit rating B+/Negative/-- B+/Stable/--

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