Fitch Places NOVA on Watch Positive After IPIC Buy Offer & New Financing

Business Wire, Feb 24, 2009

CHICAGO -- International Petroleum Investment Company's (IPIC) planned acquisition of NOVA Chemicals Corporation (NOVA), if completed, contains several potentially positive credit implications for the company's ratings, according to Fitch Ratings. Fitch has placed NOVA on Rating Watch Positive following the announcement, as well as news that NOVA has made significant progress in meeting $200 million in financing requirements needed to maintain current covenant relief.

IPIC agreed to acquire the common shares of NOVA for cash consideration of US$6 per share, a premium of 348% over the Feb. 20, 2009 closing price of the shares on the NYSE. IPIC is a 100% state-owned fund of Abu Dhabi (Long-term IDR rated 'AA' with a Stable Outlook by Fitch) with significant strategic ties to the sovereign. The arrangement is subject to a two-thirds shareholder approval, as well as other court and regulatory approvals.

Independent of the acquisition, NOVA has made substantial progress in meeting its US$200 million in staged financing requirements over the first half of the year. On Feb. 23, 2009 NOVA announced that it had signed US$150 million in new financing which has been supplied by the Export Development Corporation of Canada (EDC), as well as key Canadian banks within NOVA's existing revolver group. This development exceeds the first US$100 million financing requirement due Feb. 28, 2009 and thereby locks covenant relief in place at least until June, when the next US$100 million is due.

Assuming the transaction closes, the deal has several potentially positive credit implications for NOVA's ratings. First as a condition of the acquisition, the acquirer has agreed to provide direct credit support to NOVA in the form of a US$250 million credit backstop facility. Fitch notes that the facility can be drawn in advance of shareholder approval and the close of the transaction. The acquisition of NOVA by a highly rated entity would also be a credit positive if the acquirer were to formally guarantee NOVA's debt or provide it with other direct or indirect credit support in the future. While uncertainties exist as to NOVA's ultimate capital structure following the acquisition, it also seems likely that the acquirer would seek to enhance NOVA's credit quality from its current distressed levels in order to preserve the value of its investment in NOVA.

At this point, downsides for the rating center mostly on execution risk of the deal falling through, which would remove the potential support of IPIC as a financial sponsor, and could result in the need to find an additional US$50 million in new financing from lenders to reach its US$200 million financing requirement by June 1. Under a scenario where the deal were to fall through and NOVA were unable to procure an additional US$50 million in financing by June 1, NOVA would be vulnerable to lingering weakness in polyethylene demand in the second half of the year, as covenant waivers will expire, leaving NOVA dependent upon a recovery in chemical markets to avoid future covenant trips. While either of these scenarios remain a distinct possibility, Fitch believes that recent events have pushed the balance of risks from the downside to the upside, resulting in our current revision from Ratings Watch Negative to Ratings Watch Positive.

Fitch has placed the following ratings on Rating Watch Positive:

--IDR at 'B-';

--Senior secured revolving credit facility at 'BB-/RR1';

--Senior unsecured notes and revolving credit facilities at 'BB-/RR1';

--Preferred shares at 'BB-/RR1'.

NOVA's IDR was downgraded to 'B-' on Feb. 2, 2009 on the news that its bank group had imposed a requirement that NOVA must secure US$200 million in new financing as a condition to achieve waivers on key covenants over the first half of the year. These covenants apply to two of NOVA's revolvers, as well as its US$300 million A/R Securitization Facilities and total return swap. This financing requirement was publicly announced at the end of last month, with the first financing hurdle of US$100 million due Feb. 28, 2009.

NOVA has significant maturities due in 2009. Current liquidity remains strong, with total availability across all of NOVA's facilities on Dec. 31, 2008 of US$573 million, at the top end of NOVA's preferred liquidity range, versus US$376 million in maturities due this year, including US$250 million of 7.4% notes due in April and US$126 million in preferreds due in October.

To date, NOVA has retired US$125 million of 7.25% 2028 notes putable by bondholders in August 2008 and rolled over US$126 million in preferreds (net of restricted cash) to October 2009. On Dec. 31, 2008, NOVA had a total of five separate revolvers totaling US$683 million and a US$300 million A/R securitization facility. Its largest secured revolver (US$350 million) matures in June 2010. Maturities across other revolvers vary but generally range from 2010-2013.

NOVA is a multinational producer of commodity chemicals including styrene, polystyrene, ethylene and polyethylene with approximately 3,300 full-time employees. A majority of its assets are located in Canada and the U.S. In North America, NOVA is the leading producer of styrene and expandable polystyrene and the fifth-largest ethylene producer. NOVA reports three business segments; olefins/polyolefins, performance styrenics, and the INEOS-NOVA Joint Venture. In 2007, the United States accounted for 43% of sales, Canada accounted for 35%, Europe and rest of the world accounted for 22%. Polyethylene and styrenic polymers are used in rigid and flexible packaging, containers, plastic bags, plastic pipe, electronic appliances, housing and automotive components and consumer goods. Exports to Asia are enabled in part by low-cost back-haul shipping economics from Western Canada.