S&P Assigns 'BB-' Corp. Rating to Valvoline (VVV); Outlook is Positive (ASH)

S&P Global Ratings today assigned its preliminary 'BB-' corporate credit rating to Lexington, Ky.-based Valvoline Inc. (NYSE: VVV). The outlook is positive.

We also assigned our preliminary 'BB' issue rating to the $1.325 billion five year senior secured credit facilities, which consist of a $450 million revolving credit facility and $875 million term loan. The recovery rating on the credit facilities is '2', indicating that creditors could expect substantial (70% to 90%, in the higher half of the range) recovery in the event of a payment default. We estimate pro forma reported debt outstanding at the time of the separation from Ashland (but prior to any IPO) will total $1.25 billion.

We are also assigning our preliminary 'B+' rating to the company's $375 million senior unsecured notes, with a recovery rating of '5', indicating our expectation of modest (10%-30%, at the lower end of the range) recovery in the event of a default. Valvoline Finco Two is the borrower of these notes.

Our preliminary ratings--which are subject to change--assume the various steps in the separation of Valvoline from Ashland occur on substantially the terms presented to us. This includes:

• Valvoline, a newly created entity wholly owned by Ashland, will be the owner of substantially all of the Valvoline business, and a stand-alone entity separate from Ashland. We assume any guarantees presently in place or expected to be in place between various Ashland and Valvoline entities at some stage of the separation process are to be released. Valvoline and Ashland Global will have entirely separate capital structures without any cross-guarantees, cross-asset pledges, or other credit support. Our preliminary ratings assume that Valvoline Inc. becomes the owner, directly or indirectly, of the Valvoline business and that Ashland completes the separation.
• Valvoline will distribute all of the proceeds from the $875 million term loan and a future contemplated senior note issuance to Ashland. The revolver will be unutilized until the lubricants business is transferred to Valvoline and Valvoline assumes the obligations.
• Valvoline will be the obligor under the credit facilities and any other material funded debt issuance following the transfer of the Valvoline business to Valvoline Inc.
• Ashland will transfer to Valvoline a substantial amount of its under-funded pension and post-retirement plans. Valvoline will establish a receivables securitization facility for post-separation liquidity purposes.

Our ratings on Valvoline incorporate the company's well-known, reputable brand name, its defensible position as the third largest competitor in the U.S. do-it-yourself (DIY) lubricants business, its satisfactory margins, relatively stable profitability, and moderate financial leverage. The ratings also factor in Valvoline's substantial brand concentration and moderate customer focus with several large automotive part retailers and installers, the solid competition it faces from several large competitors that possess substantially greater resources than the company, and its participation in a low-growth industry that is subject to volatile base-oil prices, the amount of vehicle miles driven, and potential further improvements in engine technology that could result in a further reduction in oil usage.

We believe Valvoline has largely offset industry headwinds by gaining market share, primarily in the premium-branded segment of the market, by increasing sales of non-lubricant products, and expanding its footprint in the higher-growth quick-lube service change sector. The company has moderately high financial leverage, including debt to EBITDA in the low-4x area, prior to any debt reduction contemplated from any potential IPO proceeds. We estimate on a pro forma basis that Valvoline will have about $1.8 billion of adjusted debt (including tax-affected under-funded pension and post-retirement plans).

The positive outlook reflects the potential for a one-notch upgrade within the next 12 months if the company is able to complete an IPO and use the majority of the proceeds to reduce debt. Specifically, we could upgrade Valvoline if, following the reduction in debt, FFO to debt appears likely to strengthen to the 20% to 25% level on a sustainable basis.

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