Fitch Rates NOVA Chemicals' Notes 'BB+'

Fitch Ratings has assigned a 'BB+' rating to NOVA Chemicals Corporation's (NOVA) $500 million privately placed senior unsecured notes. Proceeds from the offering will used to redeem the existing $350 million senior unsecured notes due 2019 on Nov. 3, 2014, with the remaining proceeds to be used for general corporate purposes, according to the company.

KEY RATING DRIVERS

The ratings reflect NOVA's position as a low-cost ethylene producer. NOVA benefits from low-cost feedstock at both its Joffre, Alberta and Corunna, Ontario sites after converting the Corunna cracker to accept light feedstock. The company is also sourcing ethane directly from the Williston (for Joffre) and Marcellus (for Corunna) basins. EBITDA margins have increased to above 20% after being below 10% in 2009.

Fitch believes NOVA's financial management is conservative. NOVA has reduced its debt balances since it was acquired by IPIC PJSC ('AA'/Stable Outlook) in 2009. Debt declined from $1.8 billion at the end of 2009 and is expected to be approximately $1 billion after accounting for the new issuance and repayment of the notes due 2019. Leverage is strong as well, measuring 1.1x on a total debt to operating EBITDA basis, and is expected to fall to 0.8x after the other notes are called in November. While distributions to IPIC and capital expenditures have been growing, NOVA has produced meaningful positive free cash flow (FCF; cash from operations less capital expenditures and dividends).

The company is in the midst of executing its NOVA 2020 plan which includes transitioning the Corunna cracker to 100% light feedstock and building another polyethylene reactor at Joffre which is expected to be completed by the end of summer 2016. Capital spending will peak in 2014 and 2015 for these projects, but Fitch believes additional borrowings are not likely necessary given strong cash generation and large cash balances.

Credit weaknesses include the company's lack of product diversification. NOVA produces a variety of polyethylene products (HDPE, LDPE, and LLDPE) and grades but no other ethylene derivatives. NOVA's competitors with other ethylene chains can direct ethylene production to the highest margin intermediate- or end-product. NOVA's products are also commoditized in nature. A number of producers manufacture similar products.

Fitch acknowledges the cyclical nature of commodity chemicals. NOVA is dependent upon plastic demand for revenue growth. Plastics demand generally tracks global economic growth. With global economic growth sluggish, growth in plastic demand has been less than robust. While revenue growth has not been the driver of NOVA's expanded EBITDA margins and growing EBITDA, Fitch believes there is limited continued upside for costs. Supply dynamics of the industry also influence plastic prices and margin realization.

The advantaged cost position for North American ethylene production has spurred capacity expansion activity. North American ethylene production could see up to 12.5 million tonnes of additional annual capacity coming online by 2019. If fully completed, these additions would correspond to over half of U.S. capacity according to ICIS and would have the potential to reverse the currently favorable environment. Typically, capacity additions come in very sizeable increments and are often executed by multiple industry participants at the same time. After these additions have come online, it often takes several years to absorb the resulting supply glut.

LIQUIDITY

NOVA has sufficient liquidity to enable the company to fund working capital and capital expenditure requirements and to withstand less favorable industry conditions, if a reversal of the positive dynamics were to occur. Accounting for the new issuance, expected repayment of the senior unsecured notes due 2019, and the $510 million distribution to the parent company in July, NOVA is expected to have more than $800 million in total liquidity, consisting of $329 million in cash on hand and $507 million available under its syndicated and bilateral credit facilities. Fitch projects marginal negative FCF in 2014 and 2015, but cash balances will enable the company to fund the use of cash without significant additional borrowings.

NOVA's main $425 million senior secured credit facility, which matures in December 2017, is governed by a senior debt-to-cash-flow covenant of max 3x and a debt-to-capitalization covenant of max 60%. NOVA was in compliance with these covenants at June 30, 2014. Fitch expects the company to remain in compliance throughout the lifetime of the facility. The facility is secured by the net book value of assets in Canada, including NOVA's interest in the Joffre, Alberta chemical complex and the Corunna, Ontario facility.

The company has a favorable maturity schedule. After the repayment of the senior unsecured notes due 2019, NOVA will not have any large principal payments due until 2023. NOVA has three notes outstanding, $350 million due 2019, $500 million due in 2023 and $500 million due in 2025.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Continued progress in capital spending plans with limited need to add to debt levels;

--Naming a full time CEO with a commensurate commitment to current strategies;

--A sustained return to Fitch-calculated FCF generation following current capital expansion;

--Hard credit support from IPIC.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--A sustained return of adverse economic conditions and excess capacity for the chemical industry leading to weak sales and profits;

--A sharp erosion of the company's feedstock advantage resulting in higher debt funding during the capex buildout period;

--Expectations for prolonged meaningful negative FCF leading to debt levels where leverage is sustained around 3.0x on a total debt to EBITDA basis through the cycle;

--Substantially increased distributions to IPIC funded by debt.

Fitch assigns the following rating:

--$500 million privately placed senior unsecured notes rated 'BB+'.

Fitch has the following ratings on NOVA:

--Long-term IDR 'BB+';

--Senior secured revolving credit facility 'BBB-';

--Senior unsecured revolving credit facilities 'BB+';

--Senior unsecured notes 'BB+'.

The Rating Outlook is Positive.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 2014);

--'Rating Chemical Companies' (August 2012).

Applicable Criteria and Related Research:

Rating Chemical Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682313

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=902554

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