Target: Philadelphia Energy Solutions Refining and Marketing LLC
Action: $500 million senior secured term loan
Sponsor: Carlyle Group
The special dividend, assuming it goes to Carlyle Group and other shareholders, would mark an early windfall on an especially high-profile deal for the buyout shop. Philadelphia Energy Solutions bought the complex last September after an effort by local officials to keep 850 jobs at the complex. The deal drew support from the United Steelworkers, and provided fodder to industry supporters looking to combat negative press stemming from the presidential campaign (See July 2 issue of Buyouts).
After several years of weak results, Sunoco put the refinery up for sale in 2011. Carlyle Group paid $175 million and Sunoco signed the refinery over to the joint venture for a roughly 33 percent non-operating ownership interest. Carlyle Group owns two thirds and holds a majority voting position on the board of directors. Washington-based Carlyle Group funded the venture from its small market growth fund, along with a financing commitment from the state of Pennsylvania.
A source close to Carlyle Group said the firm doesn’t plan to trigger the dividend right away. A Carlyle Group spokesman declined to comment.
S&P analyst Nora Pickens said the rating agency expects Philadelphia Energy Solutions “will maintain adequate liquidity” and that crack spreads—the profit between the cost of crude oil used a raw material and the price of refined products such as gasoline—will remain supportive of credit.
Under S&P’s definitions, obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’ and ‘C’ are regarded as having speculative characteristics, with ‘BB’ the least degree of speculation and ‘C’ the highest.
The refinery ranks as the largest on the East Coast and the eighth biggest in the United States, according to a 2011 list by the U.S. Energy Information Administration.
S&P said it could lower its rating on Philadelphia Energy Solutions “if industry conditions weaken materially” or if unplanned down time causes the total debt EBITDA above 3.5x to 4.0x.
“Given PES’ concentrated geographic and asset position, we view an upgrade as unlikely,” S&P said. “However, we could consider it if the company improves its business risk profile by increasing the size and diversity of its refining assets, or diversifies its cash flow into more stable sources such as logistics assets.”
The $500 million offering has drawn a ‘BB-‘, or non- investment grade rating from Standard & Poor’s. Philadelphia Energy Solution drew a ‘B+’ corporate rating, or one notch lower than the secured loan, with a stable outlook.
Since Carlyle Group’s move into the business, refining stocks have continued their strong perfomance along with equities in the broad energy sector. While East Coast refiners don’t have access to cheaper crude oil from the Midwest, the economic importance of keeping refining capacity near the U.S.’s heavily populated Northeast has refocused attention on refineries that remain in operation. Several facilities have been shut down in recent years, including Hess Corp.’s plan to close its unprofitable Port Reading, N.J., refinery this year.