Lehman Brothers' $1 billion credit for Tesoro Petroleum has been assigned a Ba2 rating byMoody's Investors Service, with the rating incorporating the leverage taken on for the large, debt-funded BP purchase. Additionally, the two refineries, infrastructure assets and related marketing of BP appear to have been bought at a premium relative to other refining asset transactions. The credit is split between a $175 million five-year revolving credit, an $85 million five-year term loan "A," a $90 million five-year delayed draw-term loan, a $300 million six-year term loan "B," and a $350 million capital markets term loan, expected to be refinanced with a subordinated note issuance. The term loan "B" has been well received in syndication following launch, as bankers cited the attractiveness of the sector (LMW, 9/10).
The Moody's report indicates debt has increased to about $1.1 billion from $356 million, with debt-to-capitalization increasing to 62% from 33%. The rating reflects uncertainty about future regional margin trends for the assets acquired from BP and Tesoro's ability to source crude as competitively as BP. The rating additionally takes into account Tesoro's significant capital spending requirements and plans, as well as ongoing potential for strategic acquisitions as Tesoro continues to build scale, diversification and marketing reach to remain competitive in the consolidated refining and marketing industry. The rating also recognizes Tesoro's concentration on refining and marketing in a sector that is intensely competitive.
Should there be a sustained period of below mid-cycle refining margins and/or should additional acquisitions delay debt reduction and impair debt coverage, the rating outlook could become pressured, according to Moody's. The company may sell non-core assets, which could accelerate debt reduction, although the timing and amount of the proceeds are uncertain. There are upsides, for instance, Tesoro has greater refining and marketing scale, increased geographic diversification and the supportive niche markets in which it operates.