Fitch rates Sunoco's secured revolver 'BBB-'; affirms existing IDR at 'BB+'

Source: Fitch Ratings

Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Sunoco Inc (NYSE: SUN) at 'BB+' and assigned a 'BBB-' rating to the company's $800 million secured revolver. Fitch has also withdrawn ratings for the company's Commercial Paper program and short-term IDR and the 2012 6.75% convertible notes, which have been redeemed. The Rating Outlook is Stable. A full list of ratings can be found at the end of this release

Today's rating action affects approximately $1.15 billion in debt at the Sunoco, Inc level.

Ratings rationale

Sunoco's ratings are supported by the stability of the company's portfolio of ratable, distribution-based successor businesses - Sunoco Logistics (SXL, rated 'BBB', Stable Outlook) and Retail Marketing; the company's currently high liquidity; and historically conservative credit profile. Ratings issues for bondholders include the reduced business diversification and smaller earnings base at Sunoco following the spin-off of SunCoke and disposition of refining and chemical assets; and the increased structural subordination of debt at the parent level to debt at Sunoco Logistics Partners L.P.

Restructuring activity

The restructuring of the company has accelerated with the company's announcement in September that it would sell or idle its Philadelphia and Marcus Hook, PA refineries no later than July 2012 as it continues to transition from a manufacturing-centered business model to a distribution-centered business model. Following the March 1 sale of the 170,000 barrels per day) (bpd) Toledo refinery to a subsidiary of PBF Holding Company, Sunoco's total refining capacity stood at just 505,000 bpd, a little over half of the 910,000 bpd capacity it had a few years ago.

Recent financial performance

Sunoco's recent financial performance has been reasonable. As calculated by Fitch, for the latest 12 months (LTM) ending Sept. 30, 2011, the company generated EBITDA of $912 million, and had reported debt of $3.52 billion for unadjusted debt-to-EBITDA of approximately 3.86 times (x) and funds from operations (FFO) interest coverage of 5.5x. It is important to note that only about one-third ($1.13 billion) of the above-listed debt figure is parent-level debt (Sunoco, Inc), with the remaining subsidiary-level debt which is consolidated on Sunoco, Inc's balance sheet but is non-recourse to the parent. This includes the debt of Sunoco Logistics ($1.7 billion) and SunCoke ($698 million).

Sunoco's free cash flow for the LTM period ending Sept. 30, 2011 was -$496 million but was significantly affected by unfavorable working capital movements. With the company's expected exit from refining, Fitch anticipates future working capital needs will contract sharply.


Sunoco's liquidity was very robust at Sept. 30, 2011 and included approximately $1.66 billion in cash; 90% availability on the company's $1.2 billion unsecured revolver after letters of credit (LOCs) of $115 million; and full availability on the company's $250 million accounts receivable securitization facility. Key financial covenants in the revolver include a minimum tangible net worth (TNW) requirement and a maximum consolidated net-debt-to-capitalization ratio of 60%. Pending Sunoco, Inc. maturities are manageable and include a $250 million 4.875% note due 2014, $250 million of 9.63% notes due 2015, and $400 million of 5.75% notes due 2017.

Revolver replacement

Sunoco recently replaced its existing unsecured $1.2 billion revolver with a one-year, $800 million secured facility. Borrowings are the minimum of $800 million commitments or the value of the borrowing base (redetermined monthly). The security includes eligible cash and equivalents, inventories of crude and refined products, certain receivables from inventory sales, plus a pledged portion of SXL common units. Revolver covenants include minimum collateral coverage of 110%, and a minimum liquidity requirement of $400 million, defined as unrestricted cash plus remaining facilities' availability.

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