Albemarle rating outlook revised positive: Fitch
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Albemarle rating outlook revised to positive: Fitch

11:44 AM, 26th May 2017
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CHICAGO, US: A report from the Fitch Ratings Inc states the long-term Issuer Default Rating (IDR) of Albemarle Corporation (ALB) at 'BBB-'.

The rating outlook is revised to positive from stable. Albemarle's ratings reflect its exposure to the growing lithium industry, the relative stability of its bromine and catalysts businesses, strong FCF generation and increased financial flexibility.

Albemarle's credit metrics have improved considerably since the Rockwood transaction was finalised in early 2015 due primarily to strong growth in the company's lithium business and the repayment of greater than $2 billion of debt using proceeds from several divestitures including the sale of its Chemetall business in 2016.

The Positive Outlook reflects Fitch's view that Albemarle's positive operating momentum and strengthened balance sheet paired with a demonstrated track record of adhering to a credit conscious capital allocation policy as the company pursues its strategic goals would likely lead to a positive rating action in the coming 12-18 months.

Key rating drivers

Strong lithium growth profile: Fitch projects the lithium industry will experience substantial growth through the remainder of the decade driven primarily by demand from battery applications in end-markets such as transportation, grid storage and consumer products. Combined, Fitch estimates these end-markets accounted for between 40-45% of total lithium market demand in 2016. Fitch projects the transportation industry will be the strongest growth driver within battery applications due to the continued adoption of electric and plug-in hybrid motor vehicles. The global regulatory push towards less pollutant transportation methods as well as general consumer preference for more fuel efficient vehicles should help underpin strong demand growth in the transportation market for the remainder of the decade.

Planned lithium expenditures: Albemarle publicly guides to between $2-2.2 billion of capital expenditures over the next five years with around $700-$1 billion going towards the company's goal of dramatically expanding its lithium salts and mining/upgrading capacity. Albemarle projects it will have 85,000 tonnes lithium carbonate equivalent (LCE) of lithium salts capacity and 89,000 tonnes LCE of mining capacity by the end of 2017. It plans to increase the capacity in both lithium salts and mining/upgrading to 165,000 tonnes LCE by 2021 as part of its stated to goal to capture 50% of total lithium demand growth.

Oligopolistic markets: The markets for bromine, lithium, and refining catalysts are highly concentrated, and Albemarle is a key player benefiting from low-cost production and pricing power. The company is the second largest bromine producer after Israel Chemicals Ltd., the second largest lithium producer after Sociedad Quimica y Minera de Chile S.A., and a leader in the catalysts space. Market positions are supported by significant barriers to entry; for bromine and lithium, access to low-cost minerals, technology and track record.

Stable demand in catalysts and bromine: Bromine specialities and Refining Solutions generally serve mature markets that grow at or around GDP levels. Fitch believes the bromine industry is in secular decline given bromine's prime application as a flame retardant for consumer electronics where demand has declined steadily since 2011. However, Albemarle boasts one of the lowest cost positions in the bromine industry and is a leader in most bromine derivatives, allowing it to maintain EBITDA margins around 28%. Fitch projects growth in the segment to average around 0-1% going forward and expects the company to run the business with a focus on cash generation to help fund the lithium buildout.

Reliable FCF generation: Strong growth in lithium and stable demand in bromine/catalysts should enable Albemarle to generate between $150-200 million of FCF on average. Fitch believes this strong cash flow profile will give Albemarle the flexibility to pursue inorganic growth methods in lithium while still allowing the company to self-fund its CapEx and dividend growth.

Key assumptions

Fitch's key assumptions within our rating case for the issuer include:

  • Lithium and Advanced Materials revenue growth of between 10-15% on average through 2019 with EBITDA margins averaging around 38-40%;
  • Refining Solutions revenue growing around 1%-3% on average and EBITDA margins around 30%;
  • Revenue growth for Bromine Specialities generally flat with EBITDA margins around 28%;
  • Heightened CapEx through the forecast horizon reflecting planned expenditures in lithium;
  • Dividend growth consistent with public guidance.
  • The rating outlook is revised to positive from stable.

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