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CLMT - Calumet Specialty Products Partners LP News Story

$3.72 -0.1  -2.4%

Last Trade - 26/02/20

Sector
Energy
Size
Small Cap
Market Cap £227.2m
Enterprise Value £1.21bn
Revenue £2.71bn
Position in Universe 3395th / 6407

Fitch Expects to Rate Calumet's Unsecured Notes 'B-'/'RR4 (EXP)'; Affirms Existing Ratings

Fri 20th September, 2019 4:01pm
(The following statement was released by the rating agency)


Fitch Ratings-New York-September 20: 

Fitch Ratings expects to rate the new senior unsecured notes of Calumet 
Specialty Products Partners, L.P. (Calumet; NASDAQ: CLMT) 'B-'/'RR4 (EXP)'. In 
addition, Fitch has affirmed Calumet's Long-Term Issuer Default Rating (IDR) at 
'B-'. Fitch also affirmed Calumet's senior secured revolving credit facility and 
FILO facility at 'BB-'/'RR1' and the existing unsecured notes at 'B-'/'RR4'. The 
Rating Outlook is Stable.Calumet has announced the refinancing of its $900 
million unsecured notes due 2021 ($810 million outstanding at June 30, 2019) 
with a $100 million ABL draw, $550 million new unsecured notes due 2025, and 
open market repurchases with cash on hand. The transaction resolves the 
impending 2021 maturity wall and, in Fitch's view, better positions Calumet to 
refinance the 2022 and 2023 notes.The ratings reflect Calumet's stronger credit 
metrics, including leverage at or below 5.0x through the forecast, and improved 
debt maturity profile. The company has also transitioned to free cash flow 
positive, and Fitch forecasts continued FCF generation in our base case. 
However, Calumet's fuel products segment is levered to commodity and refined 
products prices, and significant maturities remain in 2022 and 2023. 
Management's self-help measures have been credit positive, and although the 
company faced challenges with the implementation of its new ERP system, Calumet 
is moving towards resolution of these issues, and the ERP system should 
ultimately provide long-term benefits to operations.

Key Rating Drivers

Upcoming Maturities Remain: The refinancing of the 2021 notes improves Calumet's 
maturity profile, and significantly reduces the absolute level of debt 
outstanding. Although over $675 million in aggregate of unsecured notes come due 
in 2022 and 2023, Fitch believes Calumet will be able to address these upcoming 
maturities through a combination of new debt issuance and repayment with FCF.In 
terms of additional liquidity levers, fuel refinery (Great Falls or San Antonio) 
asset sales remain as an option to address the upcoming maturities; however, 
refinancing the 2022 and/or the 2023 maturities with secured notes is no longer 
feasible, due to springing security provisions and a reduced secured debt basket 
under the new 2025 notes indenture. The provision removes risk that unsecured 
notes become subordinated, which Fitch believes will improve refinancing 
prospects, because all future issuances will rank equally in right of payment 
and security.Leverage High but Improving: Calumet's $900 million unsecured notes 
were replaced with only $550 million of new unsecured notes and a $100 million 
ABL draw under an borrowing base expansion secured by the Great Falls refinery, 
but the borrowing base expansion amortizes over the next 10 quarters and is thus 
not a permanent addition to the capital structure. Fitch views the amortization 
favorably, as it links delevering to FCF generation and reduces the amount of 
notes to be refinanced. Consequently, we expect Fitch-calculated leverage 
between 4.5x-5.0x through 2021. This is an immense improvement from year-end 
2018 and from double digit leverage metrics in 2016.The 2022 and 2023 maturities 
present further opportunity to delever if they are similarly addressed via a 
combination of new notes and repayment in cash. If either or both of these 
maturities were retired with proceeds from the divestiture of a fuel products 
refinery, Fitch would view the transaction as credit positive to the extent such 
asset sales aide in delevering and transitioning toward a more specialized asset 
profile.Positive FCF Generation: Calumet has executed on its plan to generate 
more consistent, positive FCF, aided by the divestiture of volatile businesses 
in 2017, no distributions, and better working capital management. Fitch 
forecasts continued FCF generation through 2021, to be used to pay down ABL 
borrowings and accumulate cash ahead of the 2022 maturity. Over time, the trend 
toward more specialized products should help stabilize Calumet's FCF profile and 
improve its financial flexibility.Stable Specialty Products Segment: Fitch views 
Calumet's specialty products segment, which the company considers its core 
business, as providing stable and predictable cash flows that offset the 
volatility of the company's fuel products segment. The segment benefits from 
specialized product offerings that provide value to customers, have relatively 
strong brand recognition and generally serve niche end-markets. Consequently, 
gross profit margins have remained above 20%. Calumet's long-term strategy is to 
shift more of its portfolio towards these more specialized products and away 
from its fuel products segment in order reduce its cash flow variability, which 
has contributed to the company's pressured credit profile in the past few 
years.Volatility in Fuel Products Remains: Calumet remains levered to swings in 
oil prices and crack spreads through its remaining fuel products facilities. As 
a result, the company must maintain availability under its revolving credit 
facility simply to absorb quarterly working capital swings. While this risk has 
lessened with the shift towards specialty products and wider refining crack 
spreads, a return to an unfavorable oil environment approximating 2016, when 
Calumet generated ($10) million of EBITDA in the fuel products segment, would 
likely still exert considerable negative pressure on Calumet's business profile 
and its resulting credit ratings. Gulf Coast refineries are also subject to 
extreme weather events.Despite the volatility, the fuel products segment is an 
important source of cash flow for Calumet. IMO 2020, which is expected to 
increase demand for diesel fuel as a result of new regulatory standards, will 
benefit the fuel product refineries. Although the WCS-WTI spread has tightened 
since last year, Calumet continues to improve profitability by using WCS and 
Midland-priced crude feedstocks where possible.

Derivation Summary

Calumet's current leverage is higher than TPC Group Inc. (B-/Stable) or SK Blue 
Holdings, LP (B/Stable) but is expected to delever over the forecast period. SK 
Blue is primarily a specialty products producer, and although TPC formerly had 
substantial commodity price exposure, this has recently been mitigated through 
fixed price contracts. The performance of specialty peers is less reliant on 
favorable commodity price movements and therefore less volatile than Calumet's 
results are. Calumet's stated ideal operating profile is specialty-focused. 
Operationally, Calumet's many refineries and facilities throughout the U.S. 
provides the company with more flexibility/optionality than peers like TPC which 
only has two manufacturing facilities.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer- Crack spreads and 
capture rates revert to the historical mean, IMO 2020 takes effect;- Product 
volumes exhibit their usual seasonality in 2019 and grow in line with GDP 
thereafter, with the exception of branded specialty products, which realize 
growth greater than GDP to reflect the focus on this segment;- Successful 
implementation of better inventory management systems result in working capital 
improvement;- A portion of the 2022 notes are refinanced, with the remainder 
repaid;- No asset sales or distributions during the forecast period.KEY RECOVERY 
RATING ASSUMPTIONSThe recovery analysis assumes that Calumet would be 
reorganized as a going-concern in bankruptcy rather than liquidated. We have 
assumed a 10% administrative claim.Going-Concern (GC) ApproachCalumet's GC 
EBITDA assumption of $220 million is a combination of a $150 million EBITDA for 
the specialty products segment and a $70 million EBITDA for the fuel products 
segment.The segment EBITDA for the specialty segment reflects its historical 
margin stability and more specialized products.The EBITDA estimate for fuel 
products takes into account the upcoming tailwinds from IMO 2020 that combined 
would likely lead to more favorable post-bankruptcy earnings for the fuel 
products segment as compared to 2016, when adverse market conditions lead to the 
segment generating negative EBITDA.An EV multiple of 5.7x EBITDA on a 
consolidated basis is applied to the GC EBITDA to calculate a 
post-reorganization enterprise value. The choice of this multiple considered the 
following factors:Fitch used a multiple of 6.0x for Calumet's specialty segment. 
Fitch believes that a highly specialized chemical company, which Fitch usually 
defines, all else equal, as a chemical company with EBITDA margins around 20% or 
greater, could see a post-bankruptcy multiple as high as the mid-single 
digits.For the fuel products segment, Fitch used a lower multiple of 5.0x. This 
reflects the relative uncertainty of the segment's cash flows due to its 
commodity price exposure and is within the general 4x to 6x sales multiple 
refineries have generally realize in an asset sale. The 5.0x multiple is below 
the median 6.1x exit multiple for energy in Fitch's historical bankruptcy case 
study, and reflects typically lower multiples for refining versus the broader 
energy space.The senior secured revolver is expected to be drawn at less than 
currently available borrowing base due to Fitch's expectation that this amount 
would likely reduce as Calumet approaches bankruptcy, especially since the 
borrowing base is recalculated monthly and influenced by commodity prices. 
Fitch's recovery analysis also includes Calumet's inventory financing 
obligations.The allocation of value in the liability waterfall results in 
recovery corresponding to 'RR1' recovery for the first lien ABL and FILO, which 
are subject to a working-capital linked borrowing base and are well 
collateralized. The Great Falls refinery is temporarily included in the ABL's 
expanded borrowing base as well. The senior unsecured notes have a recovery 
corresponding to 'RR4'.

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating 
Action- Successful transition towards specialty products leading to more 
consistency in gross profit margins and an improved FCF profile;- Debt/EBITDA 
sustained at or below 4.5x or FFO Adjusted Leverage sustained at or below 
5.0x.Developments That May, Individually or Collectively, Lead to Negative 
Rating Action- Pressured market conditions in the fuel products segment leading 
to increased volatility in margins, a negative FCF profile, and/or a weaker 
liquidity position;- FFO Fixed Charge Coverage sustained below 1.5x.The above 
sensitivities are reflective of Calumet's current cash flow profile, which is 
inclusive of its fuel products segment. Should the company continue its 
transition towards a more specialized asset profile, Fitch would likely adjust 
its positive and negative sensitivities accordingly.

Liquidity and Debt Structure

Strengthening Liquidity Position: Calumet should see its liquidity position 
strengthen over the forecast horizon due to strong FCF generation and a 
revolving credit facility that should remain undrawn, other than the $100 
million discussed above. At June 30, 2019, there was $299.6 available under the 
revolver's $376.7 million borrowing base.Maturity Profile: The revolver matures 
in February 2023. The company's senior unsecured notes are due in 2022, 2023, 
and 2025.

Summary of Financial Adjustments

Fitch has made no financial statement adjustments that depart materially from 
those contained in the published financial statements of Calumet Specialty 
Products Partners, L.P.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3. ESG issues are credit neutral or have only a minimal 
credit impact on the entity, either due to their nature or the way in which they 
are being managed by the entity.Calumet has an ESG Relevance Score of 4 for 
Exposure to Environmental Impacts because Gulf Coast refineries and downstream 
facilities have exposure to extreme weather events, namely hurricanes, which 
periodically lead to extended shutdowns. This has a negative impact on the 
credit profile, and is relevant to the rating in conjunction with other 
factors.Calumet has an ESG Relevance Score of 4 for Financial Transparency, due 
to the auditor's adverse opinion on Calumet's internal control over financial 
reporting. This has a negative impact on the credit profile, and is relevant to 
the rating in conjunction with other factors.For more information on our ESG 
Relevance Scores, visit www.fitchratings.com/esg.

Calumet Specialty Products Partners, L.P.; Long Term Issuer Default Rating; 
Affirmed; B-; RO:Sta

----senior unsecured; Long Term Rating; Expected Rating; B-(EXP)

----senior unsecured; Long Term Rating; Affirmed; B-

----senior secured; Long Term Rating; Affirmed; BB-

Contacts: 

Primary Rating Analyst

Juliana Radovanovich, 

Analyst

+1 646 582 4597

Fitch Ratings, Inc.

33 Whitehall Street 

New York 10004

Secondary Rating Analyst

Dino Kritikos, 

Senior Director

+1 312 368 3150

Committee Chairperson

Mark Sadeghian, CFA

Senior Director

+1 312 368 2090

 

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: 
elizabeth.fogerty@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10090169

Solicitation Status 

https://www.fitchratings.com/site/pr/10090169#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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