DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Superior Plus LP (Superior Plus or the Company) at BB (high) and the Senior Unsecured Debentures rating at BB based on the unchanged recovery rating of RR5. Both trends are Stable. The rating confirmations reflect DBRS Morningstar’s expectation that Superior Plus’ leverage will remain at a level commensurate with the current ratings in the near term while the Company continues its strategy to execute tuck-in acquisitions. The rating confirmations also consider Brookfield Asset Management Inc.’s (Brookfield; rated A (low) with a Stable trend by DBRS Morningstar) $350 million investment in Superior Plus in July 2020, providing the Company with funds and flexibility in an environment in which acquisition opportunities may be more attractive. The rating confirmations are also driven by the Company’s proven track record of successfully integrating acquisitions and their relative similarity in terms of business model and geography, and leading position in the Canadian propane distribution market. Finally, the rating confirmations also take into account the disruptions from Coronavirus Disease (COVID-19) that led to somewhat lower demand for propane and specialty chemicals because of the overall lower economic activity across the sector that Superior Plus services.
Since the Brookfield investment in the form of preferred shares, the Company announced three acquisitions. On September 1, 2020, Superior Plus closed the acquisition of U.S.-based retail propane and heating oil distribution company Rymes Propane & Oil for $210 million, the largest acquisition this year. Superior Plus has spent nearly $300 million on four separate acquisitions in 2020.
DBRS Morningstar expects Superior Plus’ debt-to-EBITDA for the end of 2020 and in 2021 to be below 4.0 times and cash-flow-to-debt to be slightly above 20%, levels that remain commensurate with the current rating, based on the Brookfield investment, acquisitions, effect of warmer-than-usual weather in the first part of the year, as well as coronavirus-related disruptions. DBRS Morningstar anticipates no change in Superior Plus’ strategy to make tuck-in acquisitions funded through revolver drawings in particular in the propane distribution sector in the United States; these acquisitions help the Company grow into the higher-margin retail propane market and reduce exposure to the lower-margin wholesale refined fuel business. In addition, DBRS Morningstar continues to expect Superior Plus to manage its credit metrics within levels consistent with the ratings, as acquired assets contribute earnings and synergies are realized with somewhat of a lag versus the debt funding of these acquisitions. In addition to its proven track record of successfully integrating acquisitions, the Company has also shown that it can improve leverage in a relatively short time frame following a large debt-funded acquisition.
The ratings remain well supported by Superior Plus’ excellent brand strength and reputation for outstanding customer service. The importance of the Company’s propane and chemical products to clients and the relatively well-diversified customer base help to ensure a steady level of demand for Superior Plus’ products. The economic drivers of propane demand are generally different from those underlying demand for the Company’s specialty chemicals products, offering some diversification benefits over the long term. The Company’s position as a leading distributor of propane in Canada and emergence as a significant player in the northeastern U.S. propane market also help to support the ratings. Challenges include external factors beyond the Company’s control, such as seasonal and cyclical drivers in its end markets and volatile raw material costs in the specialty chemicals business, which may have a negative impact on earnings and cash flow. The Company also faces structural challenges, such as the fragmented nature of the propane distribution market as well as the financial and integration risks associated with its current acquisition strategy.
Overall, Superior Plus’ operating performance and business risk profile continue to support the current ratings. DBRS Morningstar expects the Company to remain acquisitive and, given the fragmented nature of the propane distribution sector, there is no shortage of tuck-in acquisition targets available. However, if financial policy shifts, significant debt-financed acquisitions (especially during a period of notable market weakness), negative free cash flow, or difficulties and delays in integrating newly acquired businesses cause leverage metrics to deteriorate beyond what is considered commensurate with the ratings for an extended period of time, DBRS Morningstar could consider a negative rating action. Conversely, DBRS Morningstar would likely consider a positive rating action only if the Company demonstrated a commitment to a materially stronger financial profile over a longer period.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Industrial Products Industry (February 5, 2020), Rating Companies in the Services Industry (February 5, 2020), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2020), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at firstname.lastname@example.org.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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