S&P Global Ratings, the New York firm that judges which corporations are likely to pay back lenders and bondholders, has cut its credit rating for Philadelphia Energy Solutions Refining and Marketing LLC, which runs the former Sunoco and Arco refining complex along the lower Schuylkill in Philadelphia, to CCC-, from CCC. Both are junk-bond grades given to issuers considered unlikely to pay all they owe.
S&P cited the $550 million in payments the refinery's parent company, Philadelphia Energy Solutions LLC, a partnership of Sunoco Inc. and Carlyle Group LP, is scheduled to make next year, and the low returns currently available from refining oil. The move follows S&P's two-notch credit-rating cut, from B-, last summer. S&P threatens to cut the rating still lower by December if the company doesn't come to an understanding with its creditors.
"We continue to work constructively with our lenders to find a solution that will enable us to move forward with the right financial foundation to support our business into the future," Philadelphia Energy Solutions said in a statement. "While these discussions are ongoing, it remains business as usual." The plant at full capacity refines 335,000 barrels a day and employs more than 1,000. The company has sought to cut costs.
S&P agreed that Philadelphia Energy "continues to make progress in its efforts towards improving its financial flexibility in light of current market and regulatory challenges, including the significant financial burden imposed by renewable energy obligations (RINs)," federal subsidies to the ethanol industry, that Philadelphia Energy says will likely cost it $250 million this year. While Philadelphia Energy and other independent refiners have tried to get the government to scrap RINs, DuPont Co. and other biofuel investors and big agricultural businesses have supported ethanol subsidies.
Despite Philadelphia Energy's attempts to pacify its creditors, "we do not believe an agreement is imminent," S&P added. The credit-rating agency noted that the company's creditors gave it an extension until January 2018 "to give the company some cash flow cushion." But the agency still expects "there is a chance within the next six months that its term debt will have to be restructured or a default will occur."
Should the unit default, S&P says the parent company's senior secured debt will likely pay creditors only about 45 cents on the dollar.