Research: Rating Action: Moody’s Confirms Ba3 CFR for Delek US Holdings; stable outlook

New York, August 23, 2022 — Moody’s Investors Service (“Moody’s”) has affirmed the ratings of Delek US Holdings, Inc. (“Delek”), including Ba3 Corporate Family Rating (CFR) and B1 ratings on securities senior secured term loans. The speculative grade liquidity rating was downgraded to SGL-3 from SGL-1. The rating outlook is stable.

“The affirmation of Delek US Holdings, Inc.’s ratings reflects the strong improvement in its refining revenues in 2022 and the expected recovery of its credit metrics to levels favorable to its Ba3 CFR,” said James Wilkins, vice-president president – principal analyst of Moody’s.

Confirmed ratings:

..Issuer: Delek US Holdings, Inc.

…. Business family ranking, confirmed Ba3

…. Probability of default rating, confirmed Ba3-PD

….Senior Guaranteed Term Loan B, Confirmed B1 (LGD4)

Degraded notes:

..Issuer: Delek US Holdings, Inc.

…. Speculative liquidity rating, downgraded to SGL-3 from SGL-1

Outlook Actions:

..Issuer: Delek US Holdings, Inc.

….Outlook remains stable

RATINGS RATIONALE

Delek’s Ba3 CFR affirmation reflects its declining leverage and large cash balance which is indicative of its relatively conservative financial policies that have sustained it through periods of volatile refining industry profit margins, including the effects of the COVID-19 pandemic, and potentially high cost of compliance with the renewable fuel standards program (RIN expenses). The company’s refining operations showed rapid improvement in 2022, particularly in the second quarter, after weak performance in 2020-21. Earnings for the trailing twelve months ended June 30, 2022 remain below 2018-19 levels, but Moody’s expects continued strong earnings to improve Delek’s cash flow and leverage in 2022-23 .

Delek’s refining and marketing operations include four modest-scale refineries that are geographically concentrated and have a combined crude oil throughput capacity of 302,000 barrels per day (mbpd). The refineries are located in Texas, Louisiana and Arkansas, where they can benefit from both growing Permian crude oil production and other locally sourced crudes purchased at a discount to WTI Cushing prices. The company is also benefiting from more stable profits generated by the midstream business, thanks to its stakes in Delek Logistics Partners, LP (stable B1) and the network of retail service stations.

The secured term loan is rated B1, one notch below CFR Ba3, reflecting the priority claim of the $1 billion revolving credit facility, which shares the same collateral as the term loan, but has a first lien on working capital and a second lien on fixed assets, while the term loan has a first lien on fixed assets and a second lien on working capital. Moody’s considers the B1 rating assigned to the secured term loan to be more appropriate than the Ba3 rating indicated by Moody’s loss given default methodology, given the inherent volatility of the company’s trade payables and the lack of other significant indebtedness outstanding that is subordinate to the term loan.

The downgrade of Delek’s speculative liquidity rating to SGL-3 reflects the current maturities of its revolving credit facility and supply and offtake agreements that fund working capital at three of its refineries. Moody’s expects the company to extend the maturity of these short-term facilities and that its large cash balance and Moody’s expectation that the company will generate positive free cash flow in 2022-23 support the rating. adequate liquidity. The company has maintained high cash balances ($1.2 billion as of June 30, 2022) and expects to continue to do so. Delek’s undrawn $1 billion ABL revolving credit facility revolver had letters of credit outstanding totaling $364 million, leaving $636 million of borrowing capacity at the end of the second quarter of 2022. However, the facility, which matures on March 30, 2023, has less than a year to maturity. The Delek Revolver has a minimum fixed charge coverage ratio of 1.0x, which is only tested if excess availability is less than the greater of 10% of the Revolver’s borrowing base (capped at $1 billion ) and $90 million. Moody’s does not expect the covenant to be tested until 2023. The company’s liquidity benefits from supply and offtake agreements covering three refineries with J. Aron which expire on December 30, 2022 If these agreements are not renewed, Delek would have to invest a substantial amount in working capital. (The obligation under the supply and offtake agreements totaled $770.5 million as of June 30, 2022.)

The stable outlook reflects Moody’s expectation that Delek will continue to generate positive free cash flow in 2022-23 and maintain at least adequate liquidity.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

The ratings could be downgraded if the profitability of refining operations declines or if the cash flow retained on the debt remains below 15%. Ratings could be upgraded if retained cash flow to debt is sustainable above 25%, refining margins improve so all refineries are generating free cash flow in tough market conditions and for the company to increase its scale by adding refineries to its portfolio or expanding existing operations so that it benefits from larger-scale operations (refineries with throughput capacity greater than 100 mbpd).

The main methodology used in these ratings is Refining and Marketing published in August 2021 and available on https://ratings.moodys.com/api/rmc-documents/74331. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Delek US Holdings, Inc. (NYSE: DK), headquartered in Brentwood, Tennessee, is an independent refining and wholesale marketing company with total crude oil throughput capacity of 302 mbpd at four refineries with a complexity Nelson average of 9.6, intermediate assets and retail operations.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been communicated to the rated entity or its designated agent(s) and issued without modification resulting from such communication.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

James Wilkin
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Peter Speer
Associate General Manager
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Release Office:
Moody’s Investors Service, Inc.
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