Fitch Affirms Sunoco at 'BB' Following Acquisition Announcement
Fitch has also assigned a rating of 'BB/RR4' to SUN's \\$500 million senior unsecured notes offering due 2020. Proceeds from the notes are expected to fund a portion of the cash consideration for the Susser acquisition. The notes are being co-issued with Sunoco Finance Corp. and are expected to be pari-passu with SUN's existing senior unsecured notes.
The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
SUN has agreed to acquire Susser for roughly \\$1.94 billion. The transaction will be financed with 50% equity; 50% cash, with ETP taking back roughly \\$970 million in Class B units from SUN. The Class B units are identical to common units in all respects, except class B units will not be entitled to 2Q 2015 distributions and will convert immediately to common units on the day following the record date for the 2Q 2015 distribution. The transaction is expected to close by Aug. 1, 2015. As of June 30, 2015, Susser operated 679 retail convenience stores, 632 of which were in Texas, 29 of which were in New Mexico, and 18 of which were in Oklahoma.
ETP previously announced its intent to drop down the existing businesses in its retail marketing segment into SUN in a series of drop down transactions. Fitch believes the dropdowns of the existing businesses into SUN provide SUN a visible backlog of assets which will allow it to grow in scale, geographic diversity and ultimately distributions for investors. The dropdowns are mutually beneficial providing clear path for ETP to segregate its retail marketing segment into a dedicated vehicle with its own access to capital and a dedicated management team. For SUN the dropdown helps increase its size, scale and geographic diversity. Fitch expects the current Susser dropdown to be accretive to distributable cash flow for SUN in 2016 and believes ETP's willingness to take back units helps alleviate much of the transaction risk.
SUN's ratings are reflective of its growing size and scale, as well as, its relationship with ETP. Remaining assets expected to be dropped down to SUN at ETP consist of its remaining interest in Sunoco LLC (68.42%) and its 100% interest in Sunoco Inc. a retail business with a network of 439 company-operated retail fuel outlets and convenience stores, approximately 4,400 retail fuel outlets operated by independent operators pursuant to long-term distribution agreements and a commercial fuel distribution business that supplies approximately 600 million gallons of motor fuel per year to its commercial customers.
KEY RATING DRIVERS
Parent Affiliation: SUN's ratings consider SUN's relationship with its parent and sponsor, ETP and with ETP's parent and sponsor Energy Transfer Equity, LP (ETE; 'BB'/Outlook Stable). 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 dropdowns. 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. Fitch expects future dropdowns to be funded with a balance of debt and equity.
Growing Scale: Fitch believes that SUN will benefit from increasing economies of scale as it grows through planned drop-downs from ETP. 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 Susser acquisition Fitch expects SUN 2015 leverage, assuming a full year's worth of SHC earnings and cash flow, of roughly 5.2x. Leverage should improve in 2016 to roughly 4.9x in line with Fitch's prior expectations. 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 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 1.5x and 1.2x for yearend 2015 and 2016, respectively.
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 about 1.5%-2%;
----ETP drops down virtually all its wholesale and retail distribution assets into SUN within the next two years;
--SUN funds drop down acquisitions with a balanced mix of 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, combined with leverage 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 March 31, 2015 SUN had \\$67.1 million in cash and equivalents on hand and roughly \\$553 million in availability under its \\$1.25 billion secured revolving credit facility due 2019. SUN's revolver includes an accordion feature thus providing flexibility to increase the facility by an additional \\$250 million, subject to certain conditions, which has been exercised. 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. SUN's debt maturities are manageable, inclusive of this issuance SUN does not have any significant bond maturities until 2020.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
Sunoco, LP
--Long-term Issuer Default rating 'BB';
--Senior unsecured debt 'BB/RR4';
--Senior secured debt 'BB+/RR1'.
Sunoco Finance Corp.
--Senior unsecured Debt 'BB/RR4'.
Fitch has assigned a rating of 'BB/RR4' to Sunoco, LP and co-issuer Sunoco Finance Corp.'s senior unsecured notes offering due 2020.
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