PrefBlog

Element Fleet Management Corp. has announced:

a customer-centric plan to meaningfully improve financial performance, strengthen and de-risk the Company’s balance sheet, and position the business for growth.
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The plan includes:

• •A series of concrete actions to improve the customer experience and generate an estimated $150 million in run-rate pre-tax operating income improvements in the fleet management business by the end of 2020;
• •A $150 million investment in the business to achieve those improvements, which will be funded in part by capital retained after a reduction in the Company’s quarterly common share dividend from $0.075 to $0.045, and the introduction of a dividend reinvestment plan;
• •An agreement, subject to the satisfaction of certain conditions, to purchase the interests in the 19th Capital joint venture that Element does not already own for nominal consideration, and Element plans to undertake an orderly run off of 19thCapital’s assets over the next 36 months. In conjunction with this initiative, Element will recognize an after-tax charge of approximately $360 million in the third quarter reflecting a write down of the carrying value of its remaining investment in 19th Capital;
• •Strengthening the Company’s investment-grade balance sheet through a $300 million offering of common shares via a bought deal transaction; and
• •A clear accountability plan, including a Transformation Management Office run by a leading global consulting firm that will bring focus, support and accountability for the duration of the program, as well as regular reporting to track our performance

DBRS has announced that it:

has confirmed the ratings for Element Fleet Management Corp. (EFN or the Company), including the Company’s Long-Term Issuer Rating of BBB (high) and Short-Term Issuer Rating of R-2 (high). The trend on all ratings is Stable. The Intrinsic Assessment (IA) for the Company is BBB (high), while its Support Assessment is SA3. As a result, EFN’s final ratings are equalized with its IA.

KEY RATING CONSIDERATIONS
The ratings consider Element’s action plan following an in-depth and broad review of three distinct workstreams completed by the new executive management team and the Board of Directors that should contribute to better operating performance going forward. Nonetheless, the plan does have execution risks, including the realization of synergies and efficiencies, as well as the successful wind down of 19th Capital without additional losses or costs to Element. The Company’s position as the market leader in North American commercial fleet as well as leading positions in Australia and New Zealand, its low risk balance sheet and well-aligned funding profile support the ratings. The ratings also consider the Company’s reliance on secured forms of wholesale funding, returns that are solid, but lag the peer group at the next rating level and elevated leverage.

The Stable trend reflects DBRS’s expectation that the Company will continue to produce solid earnings from its core fleet business as it executes the strategic plan, while maintaining strong asset performance. The Company’s ample available liquidity and good access to the capital markets are considered in the trend. The Stable trend also considers DBRS’s view that the long-term fundamentals for the commercial fleet industry will remain favorable supported by the continuing trend of large corporates outsourcing the management of their commercial fleets to save costs. Moreover, the increasing volume of data produced by vehicles that may be analyzed to increase driver productivity and the operating efficiency of the fleets requires scalable IT platforms, such as that offered by EFN, further underpinning demand for commercial fleet services.

Affected issues are EFN.PR.A , EFN.PR.C , EFN.PR.E , EFN.PR.G and EFN.PR.I .

Husky Energy Inc.has announced:

a proposal to acquire all of the outstanding shares of MEG Energy Corp. (TSX:MEG) (“MEG”) for implied total equity consideration of approximately $3.3 billion. This proposal values MEG at an implied total enterprise value of $6.4 billion, including the assumption of approximately $3.1 billion of net debt.

This caused immediate reaction by Standard & Poor’s:

• •We are placing our ratings on Husky Energy Inc. on CreditWatch with negative implications, following its announced unsolicited bid to acquire oil sands bitumen producer, MEG Energy Corp.
• •We are also placing our ‘BBB-‘ global scale and ‘P-2(Low)’ Canada scale preferred share ratings on CreditWatch with negative implications, as we would lower them to ‘BB+’ and ‘P-3(High)’, respectively, concurrent with a downgrade on the company to ‘BBB’.
• •We are assuming Husky’s major shareholder will retain its majority ownership in the company, so we expect the one-notch uplift to its rating, which is supported by this ownership, should remain in effect.
• •The negative CreditWatch reflects the potential deterioration of Husky’s cash flow and leverage metrics, with the addition of MEG’s existing C$3.6 billion of debt (at June 30, 2018), and the resulting deterioration of the company’s financial risk profile, which could lead to a downgrade.

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The CreditWatch is based on the potential deterioration of Husky’s financial risk profile, if the company acquires MEG. The C$3.6 billion of MEG’s debt being assumed will materially weaken Husky’s pro forma cash flow and leverage metrics, and we believe the company’s financial risk profile might deteriorate by one category from our current weighted-average estimate for the 2018-2020 forecast period. At this time, we believe Husky’s major shareholder should retain its ownership position in the company, which would support the continued one-notch uplift to the credit rating. As a result, we believe the rating downside should be limited to one notch.
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We expect to resolve the CreditWatch placement when the transaction closes.
This should occur in early 2019.

S&P currently rates the preferreds as P-2(low).

DBRS commented:

Nevertheless, DBRS notes that if Husky’s offer is successful in its current form, the addition of MEG’s assets would be mildly positive for Husky’s business risk profile. The inclusion of MEG’s assets (1) adds to Husky’s size, (2) improves the Company’s proven reserve life index, (3) complements Husky’s other thermal oil developments in Western Canada and (4) enhances Husky’s heavy oil integration plans. Tempering the improvement in the business risk profile is a higher level of asset concentration in Western Canada and a higher proportion of thermal oil in the Company’s production mix.

DBRS notes that Husky’s credit metrics (assuming Husky’s offer is successful in its current form) are modestly negatively affected initially due to the sizable amount of MEG debt that the Company would incur. On a pro forma basis (last 12 months ended June 30, 2018), Husky’s lease-adjusted debt-to-cash flow ratio rises from approximately 1.6 times (x) to 2.3x (outside the “A” range). However, Husky has noted that approximately $200 million in synergies could be realized annually from the acquisition of the MEG assets. Also, the combined entity is expected to generate material free cash flow (cash flow after capital spending and dividends) that can be deployed to reducing net debt and financial leverage. The Company anticipates a net debt-to-cash flow ratio of the combined entity (based on current strip pricing in 2019 for West Texas Intermediate oil of USD 70.50/bbl and a heavy light oil differential in Western Canada of USD 26.26/bbl) to be approximately 1.0x in 2019.

DBRS confirmed the preferreds at Pfd-2(low) on 2017-11-14.

Affected issues are HSE.PR.A, HSE.PR.B, HSE.PR.C, HSE.PR.E and HSE.PR.G.