(The following was released by the rating agency)
-- Coffeyville Resources LLC's indirect subsidiary CVRRefining LLC is issuing $500 million of second lien notesinitially guaranteed by Coffeyville Resources. The partnershipwill use proceeds to redeem Coffeyville's $447 million of firstlien notes due 2015.
-- With proceeds from an expected IPO of CVR Refining L.P.as a variable master limited partnership (MLP), Coffeyville willredeem its $223 million second-lien notes. We expect that CVRRefining LLC will then become a subsidiary of the MLP, its $500million notes will become unsecured debt, and the Coffeyvilleguarantee will fall away.
-- We are revising Coffeyville Resources' outlook to stable,affirming our ratings on its first and second liens, andassigning a 'B+' issue rating to the new $500 million notes,reflecting our expectation of the issuance's final creditquality as unsecured debt at the MLP.
On Oct. 9, 2012, Standard & Poor's Ratings Services affirmedits 'B+' corporate credit rating on Coffeyville Resources LLC,and we revised the outlook on the rating to stable fromdeveloping. We also affirmed our 'BB' rating on its $447 millionfirst-lien senior secured notes, our 'B+' rating on its $223million second-lien senior secured notes, and we assigned a 'B+'issue rating to CVR Refining LLC's $500 million senior securedsecond-lien notes, which Coffeyville initially guarantees. Atthe same time, we revised our recovery rating on Coffeyville'ssecond-lien senior secured notes to '3' from '4', indicating ahigher expectation of recovery (50% to 70%) to lenders in apayment default, and we assigned a '3' recovery rating to thenew CVR Refining LLC notes.
We view the refinancing and restructuring of the refiningbusiness as a variable MLP as neutral to moderately positive forcredit, and our analysis considers two distinct phases. AfterCoffeyville redeems its first-lien notes with proceeds from CVRRefining LLC's $500 million issuance and before the CVR RefiningL.P. IPO, long-term debt increases by $53 million. But, becausethe two tranches of second-lien debt are secured on a pari passubasis, lenders will enjoy stronger recovery prospects becausethere is no priority first-lien debt. For this period, theissue-level credit profile will moderately improve.
In the second phase, Coffeyville will issue an IPO for CVRRefining L.P. as a variable MLP, drop the Coffeyville andWynnewood refineries and its logistics assets down to the MLP,and use some proceeds to redeem its $223 million second-liennotes. CVR Refining LLC will then become a subsidiary of the MLPand its $500 million notes will become unsecured debt. While weview the significant debt reduction positively, we believe MLPdistribution policies can weigh on financial risk becauseunitholders will expect quarterly distributions from availablecash flow. In general, we believe this leaves an MLP morevulnerable to liquidity strains than a corporate issuer. MLPsrely much more than corporations on outside sources of capitalto fund growth spending, and are more vulnerable to frozencapital markets. Lenders to the $500 million notes will alsobecome unsecured lenders with no security interests, and willnot benefit from the cash flows and diversity that thefertilizer business currently provides at the Coffeyville level.We also expect that CVR Refining LLC will enter into a $150million senior unsecured credit facility that will reducerecovery prospects if a default occurs. Because we believemanagement will work to create a final structure similar to thisexpectation, we base our second-lien debt ratings on the secondphase and therefore do not notch up the issue ratings, despite amodestly improved credit profile over the short term.
We largely base Coffeyville's current "weak" business riskand "significant" financial risk profiles on the refiningsector's volatility, and Coffeyville's concentrated asset base.Although we expect Coffeyville's refining business will continueto earn high margins with average "crack spreads" (the pricedifferential between crude oil and the refined product) in themid-teens through late 2013 because of discounted crude oilstocks in the PADD-II region, pipeline developments are likelyto compress future discounts. We expect the Enbridge-EnterpriseSeaway pipeline reversal will continue to ramp up from 150,000barrels per day (bpd) to about 400,000 bpd by early 2013, andthe Keystone XL pipeline extension, if and when it is complete,would provide additional take-away capacity to relieveoversupply in PADD-II. Furthermore, we believe Coffeyville stillremains exposed to unpredictable cyclical swings in long-termcommodity pricing. We do not expect refined product demand tostrengthen materially, assuming continued motor vehicle fuelefficiency, sustained high prices, and a slow economic recovery.
Coffeyville's June 30, 2012, trailing 12-month debt toEBITDA was 1.2x, and we expect it to remain below 2x through2013, even assuming that crude differentials and crack spreadsmoderate slightly. A sustained crude discount could help reducethe ratio further, as would the IPO and debt redemption, whichwould further reduce long-term debt. Compared with peers, theCoffeyville and Wynnewood refineries benefit from low operatingcosts per barrel. The company can also benefit from the 12.9complexity score at Coffeyville and 9.3 score at Wynnewood byprocessing heavier or sourer crude slates when pricedifferentials exist. Similarly, its PADD-II Group 3 locationscan help when the market is undersupplied and refined productsare at premium prices, although the basis has flipped in 2012due, in our opinion, to excess production relative to localdemand.
The ratings reflect the following strengths:
-- A significant West Texas Intermediate (WTI) pricingbenchmark discount to Brent crude since early 2011 has increasedrefiners' profits in PADD-II;
-- Coffeyville's high-complexity refinery assets andpipeline connectivity allow it to take advantage of crudedifferentials to WTI and its PADD-II location can help productpricing if the region is short of product;
-- Management plans for significant debt reduction using IPOproceeds;
-- Diversification of cash flows in the current structurebetween the refining and fertilizer businesses and a competitivecost structure for the fertilizer business;
-- Gathering and storage assets that allow the project tolower its crude cost and take advantage of contango pricing; and
-- A crude supply intermediation agreement with Vitol at therefineries, which minimizes inventory costs and outsourceshedging risk.
In our view, the following weaknesses partly offset thestrengths:
-- Significant commodity and pricing volatility in themerchant refining and fertilizer business;
-- Although the Wynnewood acquisition added some diversityto the asset base, both refineries are in the PADD-II region andaresubject to similar geographic economics;
-- After the IPO of the MLP, lenders to the new debt will beunsecured with no security interests, and will not benefit fromthe Coffeyville guarantee or fertilizer business cash flows; and
-- We expect the new notes will become an obligation at theMLP structure, and we generally view MLP financial policy asmore aggressive because of distribution policies that can reduceliquidity and increase reliance on capital market access forfunding.
Our ratings currently consolidate Coffeyville's fertilizerpartnership, CVR Partners L.P., which provides some additionalcash flow diversity. CVR Refining LLC is an indirect whollyowned subsidiary of Coffeyville Resources LLC, a Sugarland,Texas-based independent oil refiner and fertilizer producer.Upon redemption of Coffeyville's $447 million in first-liensenior secured notes, we plan to withdraw our ratings on theissue. After CVR Refining L.P.'s IPO, the asset drop-down, andredemption of Coffeyville's $223 million second-lien notes, weexpect that Coffeyville will have no debt and we will base ourratings for CVR Refining LLC's unsecured debt on the stand-aloneCVR Refining L.P. entity.
As of June 30, 2012, Coffeyville had about $447 million offirst-lien senior secured term notes outstanding and about $223million of second-lien senior secured notes. It also had a $400million asset-backed revolving credit facility, which we do notrate, with $53 million in letter of credit commitments and $347million of availability. CVR Partners L.P., a master limitedpartnership with common units held 70/30 between Coffeyville andpublic holders owns the fertilizer business, CoffeyvilleResources Nitrogen Fertilizers LLC (CRNF). CRNF has anadditional $125 million term loan and an undrawn $25 millionrevolving credit facility that we include in our creditmeasures. Coffeyville also indirectly holds the noneconomicgeneral partner interest.
Coffeyville Resources is a 185,000 bpd independent refinerand marketer of high-value transportation fuels, and a low-costproducer of ammonia and urea ammonium nitrate fertilizers. Thecompany's petroleum segment consists of two refineries--theCoffeyville refinery in Kansas (115,000 bpd capacity) and theWynnewood refinery in Oklahoma (70,000 bpd capacity). Theadjacent fertilizer plant at Coffeyville produces an average1,225 tons of ammonia daily and 2,025 tons of urea ammoniumnitrate and, when natural gas prices are high, it enjoys costadvantages over natural gas-based fertilizer plants because ituses petroleum coke produced at the refinery rather than naturalgas. We do not view revenue from the crude oil-gathering system,the asphalt, and refined fuels terminal facility, and the crudeoil pipeline system as significant credit factors forCoffeyville. However, the gathering system does support therefineries' realized crude differential.
We currently view Coffeyville's liquidity as "strong", withabout $1.2 billion of expected sources over the next year andsignificant cushion under its financial covenants. The companyhad a large cash position, totaling almost $693 million on aconsolidated basis as of June 30, 2012, well in excess ofexpected operating requirements for the next year. Otherliquidity sources include $347 million of availability underCoffeyville's $400 million asset-based loan facility, $25million of CRNF credit, and about $500 million of funds fromoperations in the next 12 months under our assumptions. Weestimate about $330 million of uses for the next year, includingabout $150 million of working capital requirements and $180million in capital spending. However, moving to an MLP structurecould significantly increase distributions and reduceCoffeyville's cash balance. Upon consummation of an IPO, wewould review our liquidity assessment and could lower it at thattime.
Our 'BB' issue-level rating and '1' recovery rating onCoffeyville's first-lien senior secured term notes indicatesthat we expect a very high recovery (90% to 100%) if a defaultoccurs. Our 'B+' issue-level rating and '3' recovery rating onCoffeyville and CVR Refining LLC's second-lien senior securedterm notes indicates that we expect a meaningful recovery (50%to 70%) if a default occurs. For more details on our analysis,please see our recovery report to be published shortly onRatingsDirect.
The stable outlook reflects Coffeyville's strong liquidityand our expectation of robust refining margins through 2013.However, we believe the planned MLP structure will reducebusiness diversity and is likely to increase risks inCoffeyville's financial profile, limiting its upgrade potentialuntil a track record as an MLP is established. At that point, wecould raise ratings if we think the company can maintain a debtto EBITDA ratio significantly below 2x. This could be achievableif we become convinced that the partnership will benefit fromfavorable crude and product differentials on a more permanentbasis, or if it can reduce business risk by further diversifyingits assets. We could lower the ratings if refining andfertilizer margins contract such that we expect sustained debtto EBITDA above 3.5x.
Related Criteria And Research
Criteria Methodology: Business Risk/Financial Risk MatrixExpanded, Sept. 18, 2012
Key Credit Factors: Criteria For Rating The Global OilRefining Industry, Nov. 28, 2011
Methodology And Assumptions: Liquidity Descriptors ForGlobal Corporate Issuers, Sept. 28, 2011
Principles Of Credit Ratings, Feb. 16, 2011
2008 Corporate Ratings Criteria: Analytical Methodology,April 15, 2008
Ratings List Ratings Affirmed; Outlook Revised; RecoveryRating Revised To From Coffeyville Resources LLC Corporate credit rating B+/Stable/--B+/Developing/-- 1st-lien sr secured notes BB Recovery rating 1 2nd-lien sr secured notes B+ Recovery rating 3 4 New Rating CVR Refining LLC $500 mil sr secd second-lien notes B+ Recovery rating 3
Keywords: MARKETS RATINGS COFFEYVILLERESOURCES