Sunoco’s ratings under review for downgrade after Parkland acquisition agreement

Investing.com -- Moody’s Ratings has put the ratings of Sunoco LP under review for potential downgrade. This follows Sunoco’s definitive agreement to acquire Parkland Corporation, a Calgary, Alberta-based fuel and petroleum products retailer and distributor. The ratings under review include Sunoco’s Ba1 corporate family rating (CFR), its Ba1-PD probability of default rating (PDR), and its Ba1 senior unsecured notes rating. The Ba1 backed senior unsecured ratings of NuStar Logistics, L.P. and the backed revenue bonds issued by St. James (Parish of) LA are also under review. Prior to this, the outlook for these ratings was stable.

Sunoco’s speculative grade liquidity rating (SGL) remains unchanged at SGL-2. The company plans to pay $9.1 billion to acquire Parkland, including Parkland’s outstanding debt of $3.75 billion. The remaining amount will be financed through a combination of debt and equity.

The review for downgrade is due to the debt-increasing nature of the transaction. The debt/EBITDA ratio is expected to exceed the 4.5x downgrade threshold according to Moody’s adjustments after the deal closes. The transaction also requires approval from shareholders, courts, and regulatory bodies. This is happening in the midst of a proxy battle between Parkland and its largest shareholder, Simpson Oil Limited, which holds a 19.8% stake in Parkland. The shareholder vote on the acquisition will occur at Parkland’s annual general meeting on June 24, 2025, and the transaction is expected to close in the second half of 2025.

Moody’s review will focus on Sunoco’s plan to reduce its debt, its ability to achieve its strategies considering the minimal physical overlap between the two businesses, an evaluation of the company’s strategy in the light of its recent accelerated pace of acquisitions, and the composition of the financing Sunoco uses to pay for Parkland.

Excluding the ratings review, an upgrade in ratings could occur if Sunoco’s growth and acquisition activity leans more towards stable midstream activities, and if its adjusted debt/EBITDA approaches 3.75x while maintaining strong distribution coverage. On the other hand, the ratings could be downgraded if adjusted leverage consistently exceeds 4.5x and distribution coverage is maintained below 1.2x.

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