Fitch Ratings has assigned a Long-Term Issuer Default Rating of 'B+' to
Fitch has also assigned issue-level debt ratings of 'BB+'/'RR1' to the Senior Secured ABL facility and 'BB-'/'RR3' to the Senior Secured Term Loan. The Rating Outlook is Stable.
The rating reflects the company's exposure to niche, lower competition markets and diversification through less cyclical retail and logistics segments and energy transition friendly capital projects. Other contributing factors include Par's limited size and geographic diversification, uncertainty of cash flows inherent to refiners and an unfavorable long-term regulatory environment.
The Stable Outlook reflects expectations of moderating refining performance through the cycle offset by countercyclical retail and logistics results.
Key Rating Drivers
Positive Billings Acquisition: Fitch believes
Limited Scale, Niche Market Exposure: Niche markets in the
Additionally, with 218 mbpd of throughput capacity, Fitch views Par as small-to-medium sized refiner relative to
Non-Refining Diversification: Par operates material Logistics and Retail segments which comprise approximately 35% of EBITDA in a midcycle environment. Retail and logistics' countercyclical performance is key to cash flow generation during refining downturns. The
Simplified Capital Structure: Par's simplification of its capital structure via the issuance of the
The company increased ABL capacity replacing an inventory management agreement related to its
Regulatory Pressure: Refiners face several unfavorable regulatory headwinds that will cap long-term demand for refined products domestically. These include Renewable Identification Numbers (RINs) cost under the Renewable Fuel Standard program, higher corporate average fuel economy (CAFE) standards, and regulation of greenhouse gas emissions. Par is investing in energy transition assets to offset potential regulatory exposure including projects in
Growth-Oriented Capital Allocation: Fitch expects Par will prioritize capital expenditures to improve efficiency at existing assets as well as energy transition related opportunities. Fitch believes capex will be relatively high in 2024 and 2025 given turnaround schedules and the Hawaii SAF renewable jet fuel project while trending lower in the outer years of the forecast period. Management has indicated an openness to opportunistic M&A with a preference for funding to be drawn from cash on hand and the ABL. Material debt reduction is unlikely given that the company has met management's stated gross debt target. Par has a share repurchase program that it has deployed opportunistically (
Historically Volatile Sector: Refining remains one of the most cyclical corporate sectors, and is subject to periods of boom and bust, with sharp swings in crack spreads over the cycle. A substantial and prolonged increase in crude oil prices without a corresponding increase in refined product prices would negatively affect cash flows, which is especially true for non-transportation refined products like asphalt.
Fitch notes that Par's niche markets have witnessed strong performance through 3Q23 which we expect to moderate in the short-to-medium term following crack spread tightening in the continental
Derivation Summary
Par is diversified through its logistics and retail assets which differentiates the company from pure play refiners such as PBF and Vertex. Delek also has logistics and retail assets while
While notably smaller than Delek in terms of both refining and non-refining segments, Fitch expects Par to operate with lower leverage through the cycle given improved EBITDA margins and a lower gross debt burden. Delek's PADD III positioning is positive relative to the PADD IV & V Par positions, but niche markets and supply-demand imbalance offset this.
Key Assumptions
Brent Assumptions of
WTI Assumptions of
Working Capital and S&O agreements align with price deck and utilization;
Capex in line with management guidance and turnaround schedules;
Crack spread assumptions decline through forecast;
Share repurchases from 2023-2026;
Interest rate/SOFR assumptions in line with Chatham Financial Fed Median.
Recovery Analysis
Fitch examined Par on both a going-concern (GC) and liquidation value (LV) basis, and expects they would be reorganized as a going-concern in the event of bankruptcy.
Fitch assumed an 80% draw on the
Fitch also deducts outstanding 'Intermediation Property' in equivalent amounts from both the inventory figure in the LV and the corresponding obligation under the S&O agreement. Par does not hold title to this inventory and it is not considered collateral. The company records the J. Aron titled inventory amount as inventory on the balance sheet with a corresponding liability until final sale to a third party. The remaining inventories' titles are held by Par (
Fitch applied a 10% administrative claim to the GC enterprise value (EV). Fitch's GC EBITDA reflects Par's recovery from a scenario in which near-term liquidity constraints result in default and bankruptcy. Fitch uses a 5.5x EBITDA multiple to arrive at our GC EV, reflecting diversification through retail and logistics segments. Other contributing factors include niche market position and favorable supply-demand dynamics in
Fitch's GC EBITDA of
Par's distribution of value results in the ABL facility recovering at RR1, ahead of the first lien term loan which recovers at RR3. The unsecured and subordinated
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade
Significant increase in size, scale and diversification, particularly in non-refining segments;
Midcycle EBITDA leverage maintained at or below 3.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade
Decline in refining sector fundamentals or deterioration of Par's market position;
Sustained ABL utilization over 50% of availability signifying a diminished liquidity profile;
Midcycle EBITDA leverage maintained at or above 4.0x.
Liquidity and Debt Structure
Improving Liquidity Profile, Manageable Refinancing Risk: Fitch does not see material near-term liquidity needs and believes the company's refinance risk is manageable following the refinancing completed earlier this year. Pro forma, Par's liquidity consisted of approximately
Additionally, Par employs inventory financing for crude and refined products associated with their refining operations. Par finances their
Issuer Profile
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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