DBRS Morningstar Changes Trends on Parkland Fuel Corporation to Stable from Positive, Confirms Ratings at BB

DBRS Limited (DBRS Morningstar) changed the trends on Parkland Fuel Corporation’s (Parkland or the Company) Issuer Rating and Senior Unsecured Notes rating to Stable from Positive and confirmed the ratings at BB. DBRS Morningstar also confirmed the Recovery Rating on the Company’s Senior Unsecured Notes at RR4. These rating actions reflect DBRS Morningstar’s view that the Coronavirus Disease (COVID-19) outbreak and any macroeconomic aftereffects will have a negative impact on Parkland’s earnings profile, although the duration and extent thereof remains uncertain.

On September 19, 2019, DBRS Morningstar changed Parkland’s trend to Positive from Stable, recognizing the Company’s growth, solid operating performance, and improved credit metrics over the last few years. At that point, DBRS Morningstar stated that if Parkland’s performance tracks in line with expectations while maintaining credit metrics (i.e., lease-adjusted debt-to-EBITDAR below 3.75x and lease-adjusted EBITDA coverage above 4.5x), an upgrade to BB (high) would have resulted in the following two quarters (see DBRS Morningstar’s press release titled “DBRS Changes Trend on Parkland Fuel Corporation to Positive, Confirms Ratings at BB,” dated September 19, 2019).

DBRS Morningstar expects Parkland’s revenues to be negatively affected by the coronavirus outbreak and the macroeconomic aftereffects. The retail segment will be negatively affected by coronavirus containment and mitigation measures as more people continue to work from home and abandon travel plans, leading to significant decrease in fuel demand in Q2. DBRS Morningstar expects slowdown to continue through F2020 on the backdrop of weaker broad economic activity. The commercial segment, while a smaller part of overall business, will also experience declining demand resulting from lower activity in the commercial sector, particularly the oil and gas industry. Parkland’s International segment (SOL) will face headwinds given its significant exposure to tourism industry. As such, at this point DBRS Morningstar forecasts EBITDA to decline to at least $900 million (including IFRS 16) in F2020. DBRS Morningstar had previously projected F2020 EBITDA (excluding IFRS 16) of approximately $1.0 billion.

The degree to which operating income declines would in turn weaken Parkland’s financial profile based on a corresponding contraction in cash flows and deterioration of key credit metrics to levels no longer supportive of the BB (high) rating category. DBRS Morningstar acknowledges that the Company has implemented capital preserving measures in response to the current environment. Parkland recently revised its F2020 capital expenditure program to $275 million, down from its initial forecast of $575 million, and the outlay will be directed towards low carbon-fuel refining and infrastructure investments to enhance supply capability. Parkland has also reduced its cost structure on operating costs as well as marketing, general, and administrative expenses. DBRS Morningstar expects Parkland to avoid major acquisitions in this current climate but believes the Company will become active in mergers and acquisitions by year end if coronavirus containment and mitigation measures prove effective and macroeconomic visibility improves. That said, DBRS Morningstar expects Parkland to maintain its per-share dividend. As such, DBRS Morningstar expects the Company’s key credit metrics to remain sufficient for the BB rating category over the near term. Over the medium term, while DBRS Morningstar acknowledges Parkland’s ability to preserve cash flows and liquidity, DBRS Morningstar notes that any further rating action will be more influenced by the degree to which operating income is affected. As such, in its surveillance, DBRS Morningstar will focus on assessing the duration, magnitude and extent of the impact of coronavirus on Parkland’s earnings profile, and will take further rating actions if the Company’s earnings profile deteriorates more significantly than currently expected.

Parkland’s ratings continue to be supported by its strong position as Canada’s largest independent marketer and distributor of fuels as well as its efficient operations, diversified customer and supplier base, and geographic diversification. The ratings also continue to reflect the industry’s competitive nature, exposure to economic cycles, and volatility in refinery margins as well as risks associated with environmental liability.

The adoption of IFRS 16 and the impact thereof on the credit metrics did not materially change DBRS Morningstar’s view of Parkland’s overall credit risk profile.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Merchandising Industry and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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