S&P: Parkland Fuel Corp. 'BB-' CCR Affirmed On Acquisition Of CST Brands Inc.'s Canadian Assets; Outlook Stable
"We base the affirmation the company's plan to acquire the majority of CST Brands Inc.'s Canadian assets," said S&P Global Ratings credit analyst Donald Marleau.
At the same time, we affirmed our 'BB-' issue-level rating with a '3' recovery rating on the company's unsecured debt. That said, we will likely lower our recovery rating on the debt to '4' from '3' if Parkland finances the acquisition as proposed, because we believe the addition of secured bank debt would weaken noteholders' prospects for recovery in the event of default. The company is proposing to draw C$545 million on a new C$700 million secured revolving credit facility to fund a portion of the acquisition of some of CST's Canadian assets. The remainder would be funded with C$300 million of unsecured debt and C$200 million of equity.
Parkland plans to acquire all 500 dealer-operated sites in Eastern Canada; about 45% of CST's Canadian company-operated sites (about 140 locations), mostly in Quebec; 84 cardlock sites; and a home and commercial fuels distribution business. We expect that specific retail sites to be acquired, operating under the well-established Ultramar banner, will be decided in conjunction with the Competition Bureau's review of the recently announced merger agreement between Alimentation Couche-Tard Inc. and CST.
We view the transaction as consistent with Parkland's strategy and track record of growing by acquisition and believe the acquisition will improve Parkland's position in Canadian fuel distribution and retail and convenience stores (c-stores), adding about 50% to the company's volumes of fuel in this fragmented, but consolidating industry.
That said, the acquisition would add earnings mostly from fuel distribution, limiting any potential for brand differentiation and improved pricing power. The retail sites will continue to operate under the Ultramar brand, which Valero Energy Corp. will continue to own. The addition of 150-200 sites to Parkland's current 1,100 improves scale and geographic diversity modestly.
The stable outlook on Parkland reflects S&P Global Ratings' expectation that the company's elevated leverage after the transaction will decline steadily as the company integrates the acquisition of CST's Canadian assets. As such, we expect pro forma adjusted debt leverage of about 4x upon completing the acquisition, which should approach 3x by the end of 2018.
We could lower the rating in the next year if Parkland's earnings volatility or further debt-funded acquisitions pushed debt-to-EBITDA above 4x with poor prospects for improving.
An upgrade is unlikely in the next year, but we could raise the rating if Parkland continues consolidating its key markets, which we believe would support a stronger business risk profile along with stronger shares of its core markets and less volatile cash flow, supported by adjusted leverage around 3x.