Reuters logo
TEXT - S&P affirms SunCoke 'BB-' rating
November 26, 2012 / 8:56 PM / 5 years ago

TEXT - S&P affirms SunCoke 'BB-' rating

Overview
     -- SunCoke Energy Inc. has announced plans to form a master limited
partnership (MLP), SunCoke Energy Partners L.P., which will have an ownership 
interest in certain of its coke-making facilities. 
     -- We estimate that consolidated credit metrics will remain within our 
prior expectations for the rating, and thus, the proposed MLP formation will 
not have a negative impact on SunCoke's credit metrics.
     -- We are affirming our ratings on SunCoke, including the 'BB-' corporate 
credit rating, and are removing all ratings from CreditWatch negative.
     -- The stable outlook reflects our view that SunCoke's take or pay 
contracts will allow it to maintain consolidated credit metrics that are in 
line with the current ratings, and that liquidity will remain adequate for the 
current rating.

Rating Action
On Nov. 26, 2012, Standard & Poor's Ratings Services affirmed its ratings, 
including the 'BB-' corporate credit rating, on Lisle, Ill.-based SunCoke 
Energy Inc. The outlook is stable.

At the same time, we removed all ratings from CreditWatch, where we placed 
them with negative implications on July 27, 2012.

Rationale
The rating actions reflect our view that the proposed formation of SunCoke's 
master limited partnership (MLP), despite required dividends, will not have a 
negative effect on the company's credit quality. Under the proposed structure, 
the MLP, SunCoke Energy Partners L.P., will take a 65% interest in SunCoke's 
Haverhill and Middletown coke-making facilities, located in Franklin Furnace, 
Ohio, and Middletown, Ohio, respectively. SunCoke plans to own the general 
partner of the proposed MLP, as well as all of the MLP incentive distribution 
rights and a portion of the units representing limited partner interests in 
the MLP.

According to regulatory filings associated with the initial public offering of 
the proposed MLP, SunCoke expects to receive net proceeds of about $273.5 
million from the offering; the company intends to use about $225 million to 
repay term loan debt. In addition, the MLP plans to issue $150 million in new 
senior notes. As a result, we expect consolidated book debt at both entities 
will be approximately $650 million at closing.

Our base case scenario anticipates that consolidated adjusted EBITDA in 2012 
and 2013 (including adjustments for pensions and operating leases) will be 
between $225 million and $275 million, compared with about $150 million in 
2011. We anticipate that EBITDA generation in 2012 and 2013 will be driven by 
the benefits of production at the Middletown coke facility that began 
operating in the fourth quarter of 2011, as well as relatively stable earnings 
from SunCoke's other coke-making facilities, slightly offset by weaker coal 
earnings. As a result, we estimate that consolidated debt-to-EBITDA will be 
between 3x and 4x in 2012 and 2013, and that adjusted funds from operations 
(FFO)-to-total debt in 2012 and 2013 will be above 15%. We consider these 
metrics to be in line with the 'BB-' rating given SunCoke's "aggressive" 
financial risk profile. 

The ratings on SunCoke reflect Standard & Poor's assessment of the company's 
"weak" business risk profile and "aggressive" financial risk profile. Our view 
of the company's business takes into consideration that, as an independent 
producer of high-grade metallurgical (met) coke, SunCoke has limited operating 
diversity, very high customer concentration, cyclical demand from customers, 
high capital requirements for new facilities, and a limited independent 
operating history. Also, the company operates met coal mines in Central 
Appalachia, and, typical of that region, its operations are subject to intense 
regulatory scrutiny, difficulties in obtaining permits, and challenging 
operating conditions. 

The ratings also consider the company's relatively high debt and the potential 
that SunCoke will need to spend significant capital for new projects that 
won't accrue benefits for several years. However, SunCoke has adequate 
liquidity, in our view, to fund both its operations and capital spending 
during the next couple of years, and it operates under take-or-pay contracts 
that provide steady operating earnings and cash flow.

Liquidity
Given our expectations, we view the company's liquidity position as "adequate" 
under our criteria. As of Sept. 30, 2012, we estimate that liquidity was about 
$307 million, consisting of $157.8 million in cash on the balance sheet and 
close to the full amount available on its $150 million revolving credit 
facility, aside from a small amount of letters of credit outstanding. Key 
aspects of our liquidity assessment include the following expectations:
     -- Liquidity sources, which primarily consist of FFO and availability on 
SunCoke's revolving credit facility, will exceed uses by more than 1.2x over 
the next two years;
     -- Liquidity sources will continue to exceed uses, even if EBITDA were to 
decline by 30%; and
     -- Compliance with financial maintenance covenants would likely survive a 
20% decline in EBITDA.

We estimate that consolidated cash flow from operations should be between $150 
million and $200 million in 2012 and 2013. This amount, along with balance 
sheet cash, should cover estimated capital spending of between $100 million 
and $150 million in both years. We expect the MLP to make ongoing quarterly 
cash distributions to its shareholders; however, we expect liquidity to remain 
adequate, and do not expect distributions to detract from the company's 
planned growth initiatives.

Covenants under SunCoke's bank agreements include a leverage test of 5x and an 
interest coverage test of 2x. As of Sept. 30, 2012, the company had adequate 
room under its covenants. As of Dec. 31, 2012, the leverage covenant steps 
down to 4.25x.  In addition, we expect the MLP's proposed revolver will have a 
maximum leverage test of 4x. Given our operating expectations, we believe the 
company will have adequate cushion under its covenants.

Recovery analysis
The rating on SunCoke's secured bank debt is 'BB+', two notches above the 
corporate credit rating, with a recovery rating of '1', indicating our 
expectation for very high (90% to 100%) recovery in the event of a payment 
default. We rate its senior notes 'B+' (one notch below the corporate credit 
rating), with a recovery rating of '5', indicating that lenders can expect a 
modest (10%-30%) recovery in the event of a payment default. (For the complete 
recovery analysis, see our recovery report on SunCoke, published July 30, 
2012, on RatingsDirect.)

Outlook
The stable outlook reflects our view that SunCoke will maintain consolidated 
leverage between 3x and 4x and FFO-to-debt of above 15%, metrics we consider 
to be in line with the current credit rating. We also expect liquidity to 
remain adequate to both fund the MLP's cash distributions and the company's 
planned expansion projects.

We would consider a negative rating action if consolidated leverage remains 
greater than 4x, which could happen if coal cash margins decline further, and 
if the margins realized on its domestic coke business decline due to operating 
inefficiencies. This could occur if SunCoke is unable to meet its annual 
operating budget at any given facility, if steel markets deteriorate and the 
company's customers push back on their contracts, or if its capital projects 
face delays or cost overruns. A negative rating action could also occur if the 
MLP's ongoing cash distribution requirements cause the company to increase its 
debt levels.

A positive rating action is unlikely in the coming months, given the company's 
size, scope, and aggressive capital plans. An upgrade may also be constrained 
in the near term by the MLP's ongoing cash distribution requirements. However, 
longer term, we would consider a positive rating action if the company 
demonstrates steady operating performance and is able to maintain its 
operations to finance its growth initiative without adding significant 
leverage, and is able to diversity its customer base and operations.

Temporary telephone contact numbers: Marie Shmaruk (61-3-9631-2040); Megan 
Johnston (917-715-3892).

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Methodology And Assumptions On Risks In the Metals 
Industry, June 22, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
SunCoke Energy Inc.
 Corporate Credit Rating                BB-/Stable/--      BB-/Watch Neg/--

SunCoke Energy Inc.
 Senior Secured                         BB+                BB+/Watch Neg
  Recovery Rating                       1                  1
 Senior Unsecured                       B+                 B+/Watch Neg
  Recovery Rating                       5                  5

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below