DBRS Limited (DBRS Morningstar) changed the trends on NOVA Chemicals Corporation’s (NOVA or the Company) Issuer Rating and Senior Unsecured Notes & Debentures rating to Negative from Stable and confirmed the ratings at BBB (low). The Negative trends reflect higher debt levels and, therefore, leverage as NOVA partially funded a $1.08 billion litigation payment in Q4 2019 with debt and is, for the foreseeable future, going through a significant period of softness in its end markets. The Company made the litigation payment to Dow Chemical Canada ULC and Dow Europe (collectively, Dow) related to the operation of their jointly owned ethylene 3 (E3) cracker in Joffre, Alberta, from 2001 to 2012; this adversely affected leverage metrics and will likely negatively pressure the ratings going forward. However, the rating confirmation considers NOVA’s adequate liquidity post-litigation payment and recent actions aimed to preserve cash flow. Furthermore, while the ratings continue to reflect some level of implicit support from NOVA’s parent, Mubadala Investment Company PJSC (Mubadala), which is wholly owned by the Abu Dhabi Government, DBRS Morningstar estimates that it does not support the ratings as robustly as previously noted in particular taking into account the Q4 2019 $250 million dividend to Mubadala, as expected following management’s Q3 earnings call.
NOVA is currently undertaking large capital projects that will start contributing to earnings in the 2021–22 time frame. The Company is engaged in significant investments involving its operations in Ontario, namely the 50% expansion of its ethylene cracker, which will provide feedstock to a new polyethylene facility; however, on January 9, 2020, NOVA announced its plan to sell its 50% interest in the Novealis joint venture (JV) to Borealis AG (Borealis). This decision to divest its interest in the JV means that NOVA will not benefit from the JV’s future earnings, but the proceeds from the sale and foregone capital expenditures will support liquidity in the short term.
DBRS Morningstar anticipates lower earnings and cash flows in 2020 compared with 2019 amid a continued weak pricing environment which, combined with ongoing high but slightly lower capital investment and the recent litigation payment, will lead to elevated debt levels in 2020, putting a strain on the Company’s credit metrics and pressuring the ratings. DBRS Morningstar initially anticipated support from Mubadala such that NOVA’s credit metrics and especially leverage would continue to support the current ratings; however, support is now such that NOVA’s credit metrics are more in line with a lower rating. Furthermore, DBRS Morningstar notes that the ongoing E3 litigation with Dow for operations between 2013 and judgment have not yet been resolved and could lead to another litigation payment, potentially in 2020. DBRS Morningstar will assess the impact of the potential payment, if any, when there is more clarity on the amount and terms.
Despite slightly weaker support than previously anticipated, DBRS Morningstar expects continued support from Mubadala because NOVA remains strategic to its parent as its only major holding in the North American petrochemical industry with equity valued at about $3.5 billion (on a book-value basis as at September 30, 2019). Also, a flexible dividend policy has demonstrated Mubadala’s commitment to conserving capital and ensuring sufficient liquidity at the Company. While the severity and duration of these weaker credit metrics are unclear, if debt-to-EBITDA stays above 3.0 times (x) beyond 2020, DBRS Morningstar could downgrade NOVA’s ratings. On the other hand, DBRS Morningstar may revert the trends back to Stable with rapid improvement in debt-to-EBITDA to below 3.0x and clarity on its sustainability going forward, especially with the additional potential litigation payment overhang.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Industrial Products Industry (February 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2019), which can be found on dbrs.com under Methodologies & Criteria.
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