NOVA Chemicals Corp. Senior Unsecured Debt Recovery Rating Revised To '4' From '3' On Increased Secured Debt

TORONTO (S&P Global Ratings) Dec. 7, 2018--S&P Global Ratings today said it 
revised its recovery rating on NOVA Chemical Corp.'s senior unsecured notes to 
'4' from '3'. The 'BB+' issue-level rating on the notes is unchanged. The '4' 
recovery rating reflects our expectation for average (30%-50%; rounded 
estimate 30%) recovery for the unsecured noteholders in our simulated default 
scenario. 

The rating action follows the company's announcement that it has upsized its 
revolving credit facility to US$1.5 billion from US$1.2 billion and has 
secured a delayed term loan facility of US$500 million. We estimate this 
increase of secured debt within the company's capital structure should result 
in reduced prospects for unsecured noteholders in our hypothetical default 
scenario. 

We believe that NOVA will use proceeds from the term loan to pay an estimated 
US$1 billion settlement related to the Dow Chemical Co. lawsuit. The company 
might also have to incur additional costs related to damages for the period 
beyond 2012. Furthermore, the increased liquidity provides the company with 
sufficient financial flexibility as it invests in ongoing growth projects. 
Because we had largely incorporated the payment into our forecast and we net 
all the cash from our calculation of the adjusted debt, the proposed term loan 
does not have an impact on our credit measures. We continue to expect that 
NOVA will maintain its fully adjusted three-year, weighted-average funds from 
operations debt above 30% over the next 12 months. As a result, our 'BB+' 
long-term issuer credit rating and stable outlook on the company are 
unchanged. For more information, see the report on NOVA published July 3, 
2018, on RatingsDirect. 

RECOVERY ANALYSIS
Key analytical factors
  • We have updated our recovery assumptions to incorporate the upsize in the revolving credit facility and delayed draw term loan issuance.
  • We have valued NOVA on a going-concern basis using a 5.5x multiple of our estimate of the company's fixed charges in the default year.
  • We estimate that, for NOVA to default, EBITDA would need to decline significantly, representing a material deterioration in olefins prices.
  • We assume the company's upsized corporate revolver of US$1.5 billion is 85% drawn and the delayed draw term loan is fully drawn in the default year. We also estimate a 25% draw on NOVA's accounts receivable securitization program.
  • We assume that the delayed draw term loan ranks pari passu with the revolving credit facility.
  • We estimate that, for the company to default, EBITDA would need to decline significantly, representing a substantial deterioration from the current state of its business.
  • Our recovery analysis assumes that, in a hypothetical bankruptcy scenario, senior unsecured creditors could expect average (30%-50%; rounded estimate 30%) recovery.
Simulated default assumptions
  • Simulated year of default: 2023
  • Emergence EBITDA after recovery adjustments: About US$560 million
  • EBITDA multiple: 5.5x
Simplified waterfall
  • Net enterprise value (after 5% administrative expenses): US$2.9 billion
  • Valuation split in % (obligors/non-obligors): 100/0
  • Priority claims: US$1.8 billion
  • --Recovery expectations: Not applicable
  • Collateral value available to unsecured claims: US$1.2 billion
  • Senior unsecured debt and pari passu claims: US$3.3 billion
  • --Recovery expectations: 30%-50% (rounded estimate 30%)
All debt amounts include six months of prepetition interest.