DBRS Confirms Parkland Fuel Corporation at BB, Stable, Following Announcement to Acquire 75% of Sol Investments Limited

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Notes rating of Parkland Fuel Corporation (Parkland or the Company) at BB with Stable trends. The recovery rating on Parkland’s Senior Unsecured Notes remains at RR4. The confirmation follows Parkland’s announcement that it has agreed to acquire Sol Investments Limited (SOL), a wholly owned subsidiary of SOL Limited (the Acquisition). The Acquisition is subject to customary third-party consent and regulatory approvals and is expected to close in late Q4 2018.

Parkland will acquire 75% of SOL’s shares for a total consideration of USD 1.21 billion (approximately $1.57 billion) while SOL Limited will acquire 12.16 million Parkland shares and will retain 25% of SOL’s shares. Upon close of the Acquisition, SOL Limited will own approximately 9.9% of Parkland’s shares. Also as part of the Acquisition, Parkland and SOL Limited will enter into an agreement that grants a call right for Parkland and put right for SOL Limited, pursuant to which Parkland may elect to acquire or SOL Limited may elect to sell the remaining 25% portion of SOL’s shares for a predetermined EBITDA multiple of 8.5 times (x) based on the then-current audited financial statements. The call/put rights will be exercisable by either party for a period of 90 days following the release of Parkland’s audited financial statements for the fiscal year ended December 31, 2020 (or December 31, 2021, if the Acquisition does not close on or before December 31, 2018). The call/put right will be exercisable annually thereafter by either party for a period of 90 days following the release of Parkland’s audited annual financial statements.

SOL is a privately held company owned by the Simpson family and is the largest integrated fuel marketer and convenience-store operator across 23 countries in the Caribbean with more than 4.8 billion litres of annual volume and approximately $280 million in EBITDA (as adjusted by the Company and excluding expected synergies). Parkland expects to achieve synergies of approximately 20% of SOL’s EBITDA over the next three years. SOL’s assets include:
-- 526 retail stations (197 Shell branded, 163 Esso branded and 93 SOL branded);
-- 32 import terminals, seven pipelines, three marine berths and ten charter ships; and
-- 29% ownership stake in the entity that owns and operates the SARA refinery located in Martinique with a capacity of 16,000 thousand barrels per day.

Parkland intends to finance the Acquisition with a combination of debt and equity as follows:
-- Approximately $470 million of senior bank debt, a USD 250 million (approximately $325 million) term loan and a bridge term facility of $300 million. Parkland expects to replace the term facility with alternative longer-term debt, which DBRS believes will be senior unsecured notes, prior to the Acquisition’s closing.
-- Approximately $518 million of equity financing through SOL Limited’s investment in Parkland. After closing, SOL Limited will own approximately 9.9% of Parkland’s shares.

The Acquisition is expected to further increase Parkland’s scale by adding approximately 3.6 billion litres of annual fuel volume (on a 75% pro-rata basis, increasing Parkland’s pro-forma fuel volume to approximately 21 billion litres annually) and adding approximately $210 million of EBITDA (on a 75% pro-rata basis, increasing Parkland’s normalized annual pro-forma EBITDA to over $1.0 billion). DBRS believes that the Acquisition will also benefit Parkland’s geographic diversification, increasing the Company’s retail and wholesale presence into 23 Caribbean countries and decreasing the portion of Parkland’s EBITDA from Canada to below 80% from almost 100%. While DBRS recognizes the Acquisition’s benefits for Parkland’s overall business risk profile, DBRS also recognizes the increased environmental, political and economic risks associated with the Caribbean. Nevertheless, DBRS believes that, overall, the Acquisition has a modestly positive effect on the Company’s business risk profile.

In terms of financial profile, the Acquisition will significantly increase Parkland’s balance-sheet debt by approximately $1.1 billion at the end of 2018. As such, the Company’s pro-forma lease-adjusted debt-to-EBITDAR will rise to approximately 3.70x at the end of 2018. That said, key credit metrics should improve by the end of 2019 to levels considered to be more than acceptable for the current BB rating (i.e., lease-adjusted debt-to-EBITDAR decreasing to below 3.50x and lease-adjusted EBITDA coverage above 5.0x), driven primarily by debt repayments. If Parkland (1) successfully integrates the Acquisition, (2) effectively operates in the new geographic region and (3) maintains strong credit metrics (i.e., lease-adjusted debt-to-EBITDAR below 3.75x, lease-adjusted EBITDA coverage above 4.5x and positive free cash flow after the gross dividend), a positive rating action could result within six to 12 months following the closing of the Acquisition. Conversely, although unlikely, if key credit metrics weaken (i.e., lease-adjusted debt-to-EBITDAR above 4.25x) for an extended period because of weaker-than-expected operating performance or more aggressive-than-expected financial management (i.e., additional debt-financed acquisitions and/or increasing shareholder returns), the Company’s ratings could be pressured.

While DBRS expects Parkland to acquire the remaining 25% of SOL at the earliest possible opportunity at the predetermined EBITDA multiple of 8.5x, by that time, DBRS believes that the Company will have repaid sufficient debt, such that credit metrics should remain more than acceptable for the current rating (i.e., lease-adjusted debt-to-EBITDAR below 3.75x and lease-adjusted EBITDA coverage above 4.5x).

The recovery rating on Parkland’s Senior Unsecured Notes remains at RR4, albeit at the weaker end of the recovery range, considering DBRS’s expectation that the Company will issue new senior unsecured notes and upsize its secured revolving credit facility to a maximum of $1.4 billion. If the limit on Parkland’s new upsized secured revolving credit facility is higher than DBRS expects, the recovery rating and therefore the rating on Parkland’s Senior Unsecured Notes could be negatively affected.

Parkland’s ratings continue to be driven by its strong position as Canada’s largest independent marketer and distributor of fuel as well as its efficient operations, diversified customer and supplier base, geographic diversification and the sector’s relatively high barriers to entry. The ratings also reflect the industry’s competitive nature, exposure to economic cycles and volatility in refiner margins as well as risks associated with environmental liability and growth, primarily through acquisitions.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Merchandising Industry and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on dbrs.com under Methodologies.

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 info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.