Correction: Fitch Rates Sunoco LP's $500MM Sr. Unsecured Notes 'BB/RR4'
OREANDA-NEWS. (This is a correction of a release published April 4, 2016. That release included a 'Solicitation Status' link to Fitch's website where an incorrect status was indicated for this issuer. The correct status can now be accessed via the link in this amended RAC.)
Fitch rates Sunoco, LP's (SUN) offering of $500 million in senior unsecured notes due 2021 'BB/RR4.' The notes are being co-issued with Sunoco Finance Corp. and are pari passu to SUN's existing senior unsecured notes. Proceeds from the notes are expected to be used to repay a portion of SUN's Term Loan A which it entered into to finance an acquisition of 100% of the equity interest of Sunoco Retail LLC and the remaining 68.4% interest in Sunoco, LLC from Energy Transfer Partners, LP (ETP; 'BBB-'/Stable Outlook) for roughly $2.2 billion in November 2015. The acquisition closed last week. Fitch believes the acquisition of these assets allow SUN to grow its size, scale, geographic diversity and ultimately distributions for investors.
SUN's ratings are reflective of its growing size and scale, as well as, its relationship with the Energy Transfer Equity, LP (ETE; 'BB'/Stable Outlook) family. The acquisition completes all of ETP's planned dropdowns of the legacy Sunoco Inc. and Susser Holdings retail assets. With the dropdowns complete Fitch expects SUN to be more focused on organic growth and third-party acquisitions. Fitch continues to expect ETE to be supportive of growth at all its partnerships, including SUN, as it has historically been, providing support if and as needed.
KEY RATING DRIVERS
Parent Affiliation: SUN's ratings consider SUN's relationship with its parent and sponsor, ETE ('BB'/Rating Watch Positive) and with ETP. SUN's affiliation with ETE and ETP provides significant benefits to SUN, particularly with regard to SUN's ability to acquire and fund assets through dropdown transactions such as this one. These benefits are not available to standalone partnerships. Fitch believes that the affiliation with ETP, and ultimately ETE, helps minimize event financing and operating risks associated with the newly acquired inventory of retail assets.
Growing Scale: Fitch believes that SUN will benefit from the increased economies of scale that the acquisition provides. As the store count managed by SUN continues to grow, SUN will be able to benefit from increased purchasing power, logistical support and the awareness of its top regional and national brands to create value. This growing presence should allow SUN to increase its share of a highly fragmented convenience store-fuel station market in which nearly 60% of its competitors only own one store.
Moderate Leverage: Fitch expects SUN 2016 leverage will flex out to between 5.0x to 5.5x, but fall to 5.0x and below for 2017 and beyond. If leverage were to be meaningfully above 5.0x on a sustained basis, Fitch would likely take a negative rating action. Conversely, sustained leverage below 3.5x could lead to a positive ratings action. Fitch expects future acquisitions and organic spending to be funded with a balance of debt and equity with a focus on maintaining moderate leverage at SUN. Fitch expects SUN distribution coverage of above 1.0x for 2016 through 2018. If distribution coverage were to be below 1.0x on a sustained basis Fitch would likely take a negative rating action.
Organic Growth: A key to SUN's growth going forward will be development of new stores targeted in high growth markets with favorable demographics. New stores with more open and modern store designs typically produce more cash flows than legacy stores. They carry a larger proportion of higher margin food offerings and private label products. Foodservice drives higher than average gross margins and drives additional customer traffic. SUN also plans to raze and rebuild on existing sites with attractive volume and customer traffic. Utilizing existing locations eliminates the need to permit sites. Fitch expects significant growth and acquisition capital spending for 2016-2018, which is expected to be funded on a balanced debt/equity basis, with SUN achieving leverage in the 4.0x-4.5x range on a sustainable basis.
Fitch's key assumptions within the rating case for the issuer include:
--Wholesale distribution volume growth at a five-year compound average growth rate (CAGR) of about 1.5%-2%;
--Same-store retail distribution volume growth at a five-year CAGR of 1.5%-2%;
--SUN funds drop down acquisitions with proposed debt and equity issuance.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Sustained leverage (debt/EBITDA) below 3.5x, along with consistent operating margin improvements could result in positive rating action.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Deteriorating EBIT margins at or below 1% on a consistent basis could lead to negative rating action.
--An aggressive distribution policy that consistently resulted in a distribution coverage ratio below 1.0x on a sustained basis;
--Higher than expected leverage, with debt/adjusted EBITDA ratios above 5.0x on a sustained basis could result in negative rating action.
SUN's liquidity is adequate. As of Dec. 31, 2015, SUN had $61.7 million in cash and equivalents on hand and roughly $1.03 billion in availability under its $1.5 billion secured revolving credit facility due 2019. The revolver requires SUN to maintain a leverage ratio as defined in the credit agreement of not more than 5.5x, subject to an upward adjustment to 6.0x for three fiscal quarters following an acquisition whose purchase price is not less than $50 million. SUN receives pro forma EBITDA credit for acquisitions and material projects. SUN is currently in compliance with its leverage covenant and is expected to remain so following the announced acquisition transaction. SUN's debt maturities are manageable; inclusive of the Term Loan A SUN does not have any significant debt maturities until 2019.
FULL LIST OF RATING ACTIONS
Fitch rates Sunoco, LP's (SUN) offering of $500 million in senior unsecured notes due 2021 'BB/RR4.'
Fitch currently rates SUN as follows:
--Long-term Issuer Default Rating 'BB';
--Senior unsecured debt 'BB/RR4';
--Senior secured debt 'BB+/RR1'.
Sunoco Finance Corp.
--Senior unsecured debt 'BB/RR4'.
Date of Relevant Rating Committee: Nov. 13, 2015.