October 22, 2012 / 5:40 PM / in 5 years

TEXT-S&P rates Alon USA Energy Inc

Overview
     -- Alon USA Energy Inc. is issuing a $450 million covenant light senior 
secured term loan B to refinance its existing $425 million term loan due in 
2013.
     -- We expect that Alon will redeem a portion of the new term loan and the 
Alon Krotz Springs senior secured notes with proceeds from a planned initial 
public offering (IPO) of Alon USA Partners LP as a variable master limited 
partnership (MLP). We also expect the MLP will assume about $250 million of 
the term loan.
     -- We are affirming our corporate credit ratings on Alon USA and Alon 
Krotz Springs, and assigning a 'B+' rating to the new term loan with a '2' 
recovery. At the same time we are placing the issue rating on Credit Watch 
with negative implications, reflecting the risk that the issue rating could 
fall to 'B' if the MLP assumes a portion of the debt.

Rating Action
On Oct. 22, 2012, Standard & Poor's Ratings Services assigned our 'B+' issue 
rating and '2' recovery rating, indicating our expectation of a substantial 
(70% to 90%) recovery if a payment default occurs, to Alon USA Energy Inc.'s 
$450 million senior secured term loan B issuance. At the same time we placed 
the issue rating on CreditWatch with negative implications to reflect the 
possibility that we will lower the rating to 'B' on the portion of the term 
loan assumed by the MLP in conjunction with the IPO. We also affirmed our 'B' 
corporate credit ratings on Alon and Alon Refining Krotz Springs Inc. (ARKS). 
The rating outlook is stable.

Rationale
The rating on Alon reflects its "vulnerable" business risk profile and its 
"aggressive" financial risk profile. Standard & Poor's takes a consolidated 
analytical approach to Alon, including results from the Krotz Springs refinery 
and its asphalt and retail businesses. The ratings also incorporate Alon 
Israel Oil Co. Ltd.'s support for Alon.

Our assignment of a 'B+' issue rating to the term loan reflects our view that 
the initial refinancing is credit neutral. It increases debt by about $25 
million but improves liquidity by addressing near-term maturities. The initial 
credit profile is also supported by a 75% cash flow sweep that can accelerate 
deleveraging until the term loan is reduced to $250 million. We expect that 
recent debt reduction and higher EBITDA will significantly reduce adjusted 
leverage to near 2x for 2012 and 2013. We believe the main drivers of improved 
earnings are stronger margins at the Big Spring and Krotz Springs refineries 
resulting from crude discounts and better operational performance.

However, our placement of the issue rating on CreditWatch with negative 
implications on reflects potential risks to lenders based on the company's 
announced MLP plans, which could reduce future recovery prospects as described 
in the recovery section below. The company plans to launch the IPO of Alon USA 
Partners LP as a variable MLP owning the Big Springs refinery. If executed as 
planned, we expect that net proceeds would be used to pay down debt at Alon 
and ARKS, the MLP would assume $250 million of the term loan, and the cash 
flow sweep would end. While we view the significant debt reduction positively, 
we believe MLP distribution policies can weigh on financial risk because unit 
holders will expect quarterly distributions from available cash flow. In 
general, we believe this leaves an MLP more vulnerable to liquidity strains 
than a corporate issuer that can retain a cash cushion. MLPs rely much more 
than corporations on outside sources of capital to fund growth spending and 
are more vulnerable to frozen capital markets. Security interests for lenders 
to the $250 million term loan will also become limited to the assets of Alon 
USA Partners LP and its subsidiaries, and they will face single asset risk, no 
longer benefiting from the cash flows and diversity that the retail business 
and other refineries currently provide at the Alon USA Energy Inc. level.

Despite these negatives, we believe the strength of the Big Spring asset will 
result in stronger MLP credit metrics over the short term, helping to mitigate 
the weaknesses. Currently, margins at the Big Spring facility are benefiting 
from strong distillate pricing and discounts on West Texas intermediate-priced 
crudes. High utilization also helps to lower unit operating costs per barrel, 
increasing net margins. We currently believe favorable refining conditions 
will persist at Big Spring through 2013, and under the assumed IPO terms, we 
expect adjusted MLP debt to EBITDA to be below 2x for 2013. However, we 
recognize that financial performance will be highly volatile, depending on 
industry conditions. A return to midcycle crack spreads or a moderation in 
geographic basis advantages could raise our leverage ratio calculation above 
2.5x longer term. For more analysis of the company's assets and operations, 
please see the research update published July 31, 2012.

Liquidity
Liquidity is "adequate", with sources over uses of more than 2x. We estimate 
about $335 million in current sources consisting of about $50 million in cash, 
about $215 million in funds from operations, about $40 million of assumed 
credit line availability, and about $30 million from positive changes to 
working capital. We assume uses of about $135 million consisting of capital 
spending (more than $100 million), distributions (however, after the MLP IPO 
we expect substantially all available cash will be distributed, and nominal 
debt amortization. While the sources and uses point to a "strong" descriptor, 
more qualitative factors--such as capital market access and the refining 
sector's highly volatile cash flows--limit our liquidity descriptor to 
"adequate".

Certain other factors also enhance the company's liquidity. Primarily, 
financial support from parent Alon Israel Oil, either through equity infusion 
or letter-of-credit support, has improved the companies' liquidity. Multiyear 
working capital financing agreements with J. Aron & Co. support operations by 
reducing working capital requirements at all three refineries. In the past, 
mezzanine financing and ongoing equity sales have also provided additional 
liquidity.

Recovery analysis
Alon's new $450 million term loan due 2018 and ARKS's $216.5 million senior 
secured notes due 2014 both have an issue rating of 'B+' (one notch higher 
than their corporate credit ratings) and a recovery rating of '2', indicating 
our expectation for substantial (70% to 90%) recovery in the event of a 
default.

After the IPO, the security for lenders on the portion of the term loan 
assumed by the MLP will be reduced. Although we currently view the Big Springs 
refinery as the strongest asset in the Alon portfolio in terms of contribution 
to earnings, we believe $250 million of assumed debt at the MLP could 
potentially have a recovery rating of '3' (50%-70%) in the event of default 
based on our current recovery valuation of the asset. For refineries that we 
expect to remain in operation, we generally value the fixed refinery assets at 
a multiple of $2,000 to $3,000 per barrel per day (bpd) of throughput 
capacity, depending on our assessment of the relative quality of the assets. 
These multiples are based on historical transaction prices and are adjusted 
for inflation to exclude working-capital assets and to reflect industry 
distress conditions that we believe are consistent with a default scenario. 
For the Big Spring refinery, we applied a value of $2,200 per bpd, which, 
after accounting for bankruptcy-related administrative expenses and 
prepetition interest, would yield a recovery rating of '3', indicating our 
expectation of a meaningful (50% to 70%) recovery in the event of a payment 
default. The lower recovery rating would leave the issue rating a notch lower 
at 'B', but a change in the debt amount or to our valuation assumption could 
materially change the recovery rating.
Outlook
The stable outlook reflects our expectation that Alon's financial measures 
will improve, with debt to EBITDA leverage of about 2x over the next two years 
as a result of debt repayment and increased EBITDA driven by access to 
discounted crude supply. We could lower the rating if the leverage increases 
beyond our expectations, operating problems occur at the refinery business, or 
lower margins lead us to expect sustained debt to EBITDA approaching 4x. Given 
the inherent volatility and unpredictability of the refining industry, an 
upgrade is unlikely at this time. Furthermore, we believe the planned MLP 
structure will reduce business diversity and is likely to increase risks in 
the MLP's financial profile, limiting its upgrade potential until a track 
record as an MLP is established. However, we could consider it if the company 
can establish a track record of strong operational performance, if we become 
convinced that the partnership will benefit from favorable crude and product 
differentials on a more permanent basis such that we expect midcycle margins 
that will yield a sustainable debt to EBITDA ratio below 2x, or if it can 
reduce business risk by further diversifying its assets.

Related Criteria And Research
     -- Key Credit Factors: Criteria For Rating The Global Midstream Energy 
Industry, April 18, 2012
     -- Key Credit Factors: Criteria For Rating The Global Oil Refining 
Industry, Nov. 28, 2011
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
     -- 2008 Corporate Ratings Criteria: Analytical Methodology, April 15, 2008

Ratings List

Ratings Affirmed

Alon USA Energy Inc.
Alon Refining Krotz Springs Inc.
 Corporate Credit Rating                B/Stable/--

Alon USA Energy Inc.
 Senior Secured                         B+
  Recovery Rating                       2

Alon Refining Krotz Springs Inc.
 Senior Secured                         B+
  Recovery Rating                       2

New Rating; CreditWatch/Outlook Action

Alon USA Energy Inc.
 Senior Secured
  US$450 mil term B bank ln due 2018    B+/Watch Neg
  Recovery Rating                       2

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