Overview
— SunCoke Energy Inc. has announced plans to form a master limited
partnership (MLP) that will contain a portion of its ownership interest in its
Haverhill and Middletown coke-making facilities.
— In our view, this MLP structure, which is likely to entail significant
ongoing cash distributions, could lower the company’s credit quality.
— We are placing our ratings on the company, including the ‘BB-‘
corporate credit rating, on CreditWatch with negative implications.
— In resolving the CreditWatch, we will review the cash flow and
leverage implications of the MLP structure as the company reveals more details
in public filings.
Rating Action
On July 27, 2012, Standard & Poor’s Ratings Services placed its ratings,
including the ‘BB-‘ corporate credit rating, on Lisle, Ill-based SunCoke
Energy Inc. on CreditWatch with negative implications. The CreditWatch
negative listing means we could lower or affirm the rating after we complete
our review.
Rationale
The CreditWatch listing reflects our view that that the company’s credit
quality could decline as a result of the proposed formation of a master
limited partnership (MLP) structure, which the company’s board of directors
approved on July 19, 2012. At the same time, the board approved the filing of
a registration statement to effect the initial public offering (IPO) of the
MLP. We expect the key assets of the MLP to include a portion of SunCoke
Energy’s interests in its Haverhill and Middletown coke-making facilities,
located in Franklin Furnace, Ohio, and Middletown, Ohio, respectively. SunCoke
Energy would own the general partner of the proposed MLP, SunCoke Energy
Partners L.P., as well as all of the MLP incentive distribution rights and a
portion of the units representing limited partner interests in the MLP.
SunCoke Energy expects to close the IPO of the MLP no earlier than the fourth
quarter of 2012. Concurrently with the closing of the IPO, SunCoke Energy
expects to receive a cash distribution from a portion of the net offering
proceeds and intends to use the proceeds of that distribution to repay debt,
fund expansion projects, and for general corporate purposes.
Although the company has indicated that it will pay down a portion of its
debt, MLPs typically have high ongoing cash distribution requirements, which
in our view, could divert cash flow away from funding the company’s planned
growth initiatives and cause the company to increase its debt levels. For the
rating, we would expect the company to maintain leverage in the 3x to 4x range
and funds from operations (FFO) to total debt above 15%. Under the current
structure, we anticipate the company will be within those ranges during the
next couple of years.
The rating on SunCoke Energy reflects Standard & Poor’s assessment of the
company’s business risk profile as “weak” and financial risk profile as
“aggressive.” Our view of the company’s business takes into consideration
that, as an independent producer of high-grade metallurgical coke, SunCoke has
limited operating diversity, very high customer concentration, customers that
operate in a cyclical industry, demand from customers, high capital
requirements for new facilities, and a lack of independent operating history.
Also, the company operates metallurgical (met) coal mines in Central
Appalachia (CAPP), and, typical of that region, its operations are subject to
intense regulatory scrutiny, difficulties in obtaining permits, and
challenging operating conditions. The ratings also consider the company’s
relatively high debt and the potential that SunCoke will need to spend
significant capital for new projects that won’t accrue benefits for several
years. Our CreditWatch placement reflects the risk that, under the MLP
structure, the company may finance a larger portion of this spending with debt.
CreditWatch
In resolving the CreditWatch listing, we will review the company’s filing for
the MLP when it becomes available. We will also evaluate the company’s
financial policy, proposed capital structure, and their effect on the
company’s credit metrics.
Related Criteria And Research
— Key Credit Factors: Methodology And Assumptions On Risks In The Metals
Industry, June 22, 2009
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Ratings Placed On CreditWatch Negative
To From
SunCoke Energy Inc.
Corporate Credit Rating BB-/Watch Neg/– BB-/Stable/–
Ratings Placed On CreditWatch Negative; Recovery Rating Unchanged
To From
SunCoke Energy Inc.
Senior Secured BB+ /Watch Neg BB+
Recovery Rating 1 1
Senior Unsecured B+ /Watch Neg B+
Recovery Rating 5 5
