Moody's downgrades Harvest Operations

Moody's Investors Service said it downgraded Harvest Operations Corp.'s corporate family and probability-of-default ratings to B3 from B2, downgraded the company's $250 million 7 7/8% senior unsecured notes due 2011 to Caa1 (LGD4, 65%) from B3 (LGD5, 76%) and affirmed the speculative grade liquidity rating at SGL-3.

This concludes the review for possible downgrade, and the outlook is stable.

The agency said the B3 corporate family rating reflects the amount of debt the company has undertaken to fund the purchase of the North Atlantic Refinery from the Vitol Group. After two rounds of capital raising efforts, the C$1.6 billion acquisition was ultimately 75% debt financed, with C$610 million of unrated convertible debt at the parent and C$403 million of units, and the purchase completed at the highest multiple for a refinery to date, according to Moody's. The majority of the debt raised for the purchase was structurally subordinate to the senior unsecured notes.

Furthermore, the high distribution unit trust model combined with the refinery expansion projects and the capital intensity of the exploration and production segment is expected to result in very limited debt reduction over the medium term, thus keeping leverage at what Moody's feels are very high levels.

The B3 rating also factors in an exploration and production business of scale that will continue to drive the majority of Harvest's consolidated cash flows and the company's demonstrated ability to continue to grow reserves and production at a manageable cost structure, the agency said.

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