How will the $120 million terminal lease valuation affect Calmet's debt-to-equity and leverage ratios?
Short answer –
The $120 million terminal‑lease valuation will add a new lease‑liability (a “debt‑like” item) to Calmet’s balance sheet, while the $80 million cash that Calmet receives is earmarked to pay down existing obligations. In net terms Calmet’s total debt will rise by roughly $40 million (‑$80 M of existing debt + $120 M of lease liability). Because equity is unchanged, both the debt‑to‑equity (D/E) ratio and any lever‑age ratio that uses total debt (e.g., Debt/EBITDA) will move upward – i.e., Calmet will look slightly more leveraged after the transaction.
Below is a step‑by‑step breakdown of why the ratios change the way they do, the assumptions you need to keep in mind, and a concrete “what‑if” illustration that lets you see the magnitude of the impact.
1. Why the lease matters for leverage
1.1 Accounting of the lease
- Under ASC 842 (US GAAP) and IFRS 16, most non‑cancellable, multi‑year leases are recorded as a right‑of‑use (ROU) asset and a lease liability at the present value of the lease payments.
- The present‑value of the lease payments for the Shreveport terminal is now $120 million.
→ ROU asset = $120 M (asset side)
→ Lease liability = $120 M (liability side)
1.2 Cash flow of the transaction
- Calmet receives $80 million in net proceeds from Eldridge.
- The press release states the cash will be used to reduce the Company’s outstanding obligations (i.e., to pay down existing debt or other liabilities).
1.3 Net effect on “debt”
| Item | Effect on Total Debt |
|---|---|
| New lease liability (capitalised) | + $120 M |
| Debt repaid with cash proceeds | ‑ $80 M |
| Net change | + $40 M |
Key point: The lease adds a new, interest‑bearing liability, but the cash proceeds partially offset that by paying down other debt. The net result is a modest increase in total debt of about $40 M.
2. How the ratios move
2.1 Debt‑to‑Equity (D/E)
[
\text{D/E} = \frac{\text{Total Debt (including lease liability)}}{\text{Shareholders’ Equity}}
]
- Equity is not directly affected by the transaction (no new equity issuance, no retained‑earnings impact reported).
- Total Debt rises by $40 M, so D/E rises proportionally.
Result: D/E goes up (i.e., the company becomes more leveraged). The magnitude depends on the pre‑transaction debt and equity levels.
2.2 Leverage Ratio (Debt/EBITDA)
[
\text{Leverage Ratio} = \frac{\text{Total Debt (incl. lease liability)}}{\text{EBITDA}}
]
- EBITDA is unchanged by the lease (the lease expense is now split between depreciation of the ROU asset and interest on the lease liability, both of which flow through the income statement but do not affect the EBITDA number).
- With a $40 M increase in the debt numerator, the ratio increases.
Result: Debt/EBITDA goes up, indicating a higher leverage profile.
3. Quantitative “What‑If” Illustration
Because the press release does not disclose Calmet’s existing balance‑sheet figures, let’s plug in a representative set of numbers that are typical for a mid‑cap industrial company:
| Item (pre‑transaction) | Amount |
|---|---|
| Total Debt (excluding lease) | $500 M |
| Shareholders’ Equity | $800 M |
| EBITDA (12‑month) | $250 M |
3.1 Pre‑transaction ratios
| Ratio | Calculation | Value |
|---|---|---|
| D/E | $500 M / $800 M | 0.625 |
| Debt/EBITDA | $500 M / $250 M | 2.0× |
3.2 Post‑transaction balance sheet
| Item | Amount |
|---|---|
| New lease liability | +$120 M |
| Debt repaid with cash | –$80 M |
| Net Total Debt | $500 M + $40 M = $540 M |
| Equity | $800 M (unchanged) |
| EBITDA | $250 M (unchanged) |
3.3 Post‑transaction ratios
| Ratio | Calculation | Value |
|---|---|---|
| D/E | $540 M / $800 M | 0.675 |
| Debt/EBITDA | $540 M / $250 M | 2.16× |
Interpretation
| Ratio | Direction | % change |
|---|---|---|
| D/E | ↑ from 0.625 to 0.675 | +8 % |
| Debt/EBITDA | ↑ from 2.0× to 2.16× | +8 % |
Even with a modest $40 M net debt increase, the leverage ratios climb by roughly 8 % in this example. If Calmet’s existing debt base were smaller, the percentage change would be larger; if the debt base were larger, the change would be smaller. The key takeaway is the direction (upward) rather than the exact magnitude.
4. What the change means for stakeholders
| Stakeholder | Impact |
|---|---|
| Creditors / Lenders | A higher D/E and leverage ratio may trigger covenant‑monitoring, potentially tightening future borrowing terms or requiring a covenant reset. |
| Equity Investors | Slightly higher leverage can modestly increase financial risk, but the $80 M cash infusion improves liquidity and may be viewed positively if used to refinance higher‑cost debt. |
| Rating Agencies | The net‑increase in debt is modest; if the company’s overall credit profile remains strong (solid cash flow, good asset base), the rating impact is likely neutral to a small downgrade. |
| Management | The lease gives Calmet a $120 M asset that can be used for production, logistics, or revenue generation, offsetting the leverage impact over time. |
5. Caveats & Assumptions
- No other balance‑sheet moves were disclosed (e.g., equity issuances, asset disposals, or other debt‑repayment activities).
- Lease classification: The analysis assumes the lease is capitalised under ASC 842/IFRS 16 (the norm for a 10‑year, $120 M terminal lease). If the lease were treated as an operating lease for reporting purposes, the liability would not appear in the debt line, and the impact on D/E would be negligible.
- Cash‑use specificity: The release says the $80 M will be used to “reduce the Company’s outstanding obligations.” We assume this means paying down existing interest‑bearing debt, not, for example, paying a non‑interest‑bearing supplier invoice.
- No change in equity: No share repurchases, equity issuances, or retained‑earnings adjustments were mentioned.
- EBITDA stability: The lease‑related interest expense and depreciation are excluded from EBITDA, so EBITDA is assumed unchanged.
If any of these assumptions differ in reality, the actual ratio movement could be larger or smaller.
6. Bottom line
- Net effect: Total debt rises by about $40 M (lease liability $120 M – cash‑debt‑repayment $80 M).
- Debt‑to‑Equity: ↑ (higher leverage).
- Leverage ratio (Debt/EBITDA): ↑ (higher multiple).
- Magnitude: In a typical mid‑size capital‑intensive firm, the ratios would increase by roughly 8 %, but the exact change depends on Calmet’s current debt and equity levels.
Overall, the transaction adds a modest amount of leverage while simultaneously delivering a sizable cash infusion that can be used to refinance existing higher‑cost debt, improve liquidity, and fund the terminal’s operations. The net result is a slightly more leveraged balance sheet, but with a stronger asset base and better cash positioning.