OREANDA-NEWS. Fitch Ratings has affirmed its ratings on Sunoco, LP (SUN) and Sunoco Finance Corp. following the announcement that SUN will acquire assets from Energy Transfer Partners, LP (ETP; 'BBB-'; Outlook Stable). The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

SUN has agreed to acquire 100% of the equity interest of Sunoco Retail LLC and the remaining 68.4% interest in Sunoco, LLC from ETP for roughly $2.2 billion. The transaction will be financed with a combination of debt and equity in the form of a Term Loan A and private investment in public equity (PIPE) both of which have been pre-committed. The transaction is expected to close in early 2016.

ETP had previously announced its intent to drop down the existing businesses in its retail marketing segment into SUN in a series of drop down transactions. This transaction is the last of these dropdowns of retail from ETP to SUN. Fitch believes the dropdowns of these assets allow SUN to grow its size, scale, geographic diversity and ultimately distributions for investors. The dropdowns are mutually beneficial providing ETP the ability to raise funds to support its own growth objectives, and segregate ETP's legacy retail marketing assets into a dedicated retail vehicle with its own access to capital and a dedicated management team. Fitch expects the current dropdown to be accretive to distributable cash flow for SUN in 2016 and believes the pre-committed funding helps alleviate much of the transaction risk, particularly given weakness across the equity markets for master limited partnerships.

SUN's ratings are reflective of its growing size and scale, as well as, its relationship with the Energy Transfer Equity, LP (ETE; 'BB'/Rating Watch Positive) family. This dropdown transaction will complete all of ETP's planned dropdowns of the legacy Sunoco Inc. and Susser Petroleum retail assets. ETP had previously this year transferred its ownership of SUN's general partner (GP) and incentive distribution rights up to ETE. ETP will remain a holder of roughly 46% of SUN's limited partner units, pro forma for this transaction, and as such continue to receive significant cash distributions up from SUN.

Fitch considers SUN affiliation with ETP and ETE family to be a credit positive facilitating SUN's ability to grow rapidly through the dropdown strategy with reasonable financing flexibility that SUN otherwise would not have had on a stand-alone basis. 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 dropping down ETP's inventory of retail assets.

Growing Scale: Fitch believes that SUN will benefit from the increased economies of scale that this planned drop-down from ETP will provide. Both ETP and SUN have articulated a schedule for dropdowns to support efficient integration efforts and more quickly realize operational efficiencies. 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: Pro forma for the July 2015 Susser Holding Company (SHC) acquisition, Fitch expects SUN 2015 leverage, assuming a full year's worth of SHC earnings and cash flow, of between 4.5x to 5.0x. Leverage will flex out in 2016 to between 5.0x to 5.5x pro forma for this announced acquisition but fall to 4.5x 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 roughly 1.3x and 1.0x for year-end 2015 and 2016, respectively. 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 upwards of $4 billion in growth 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.

KEY ASSUMPTIONS

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.

RATING SENSITIVITIES
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.

LIQUIDITY AND DEBT STRUCTURE

SUN's liquidity is adequate. As of Sept. 30, 2015, SUN had $125.1 million in cash and equivalents on hand and roughly $613 million 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 proposed Term Loan A issuance SUN does not have any significant debt maturities until 2019.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings:

Sunoco, LP
--Long-term Issuer Default Rating at 'BB';
--Senior unsecured debt at 'BB/RR4';
--Senior secured debt at 'BB+/RR1'.

Sunoco Finance Corp.
--Senior unsecured debt at 'BB/RR4'.