Eastman Chemical rating outlook at stable: Fitch

Eastman Chemical rating outlook at stable: Fitch

10:14 AM, 11th September 2017
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CHICAGO, US: A report from Fitch Ratings Inc states that it has affirmed the long-term issuer default rating (IDR) and senior unsecured debt ratings of Eastman Chemical Company (EMN) at BBB. Fitch has also affirmed the company's short-term IDR and commercial paper rating at F2. The rating outlook is stable. 

EMN's ratings reflect the company's strong free cash flow (FCF); diversified portfolio of specialty chemicals products; good pricing power in key end user markets; stable through-the-cycle margins; vertical integration of production streams along the acetyl, polyester, olefin, and amine value chains; access to low-cost feedstocks in North America; moderate improvement in credit metrics; as well as our expectations that the company will continue to de-lever its post-acquisition balance sheet. The recommendation also reflects Eastman's multiple options for preserving liquidity in a stress scenario.

Offsetting considerations include continued weakness in the Fibers segment due to aggressive competitor pricing; somewhat slower than expected top line and operating income growth following the Taminco and Commonwealth Laminate acquisitions; and exposure to volatile feedstock costs, which lead to periodic lags between the pricing of feedstocks and derivative products. More sizable M&A is also a risk, although the company has indicated it is more interested in bolt-on than transformative deals.

Key rating drivers

Diversified speciality chemical company

EMN is a diversified speciality chemical company with a portfolio of differentiated products across four main business segments: Additives & Functional Products (AFP); Advanced Materials (AM); Chemical Intermediates (CI); and Fibers.

Eastman has the #1 or #2 market position in many product lines in its segments including cellulosic polymers, hydrocarbon resins, insoluble sulfur, ketones, and alkylamine derivatives (AFP); copolyester, branded window film (AM); North American oxo-alcohols, non-phthalate plasticizers and alkylamines (CI); and acetate tow (Fibers). EMN's strong market position and good pricing power across speciality products differentiate it from more monoline businesses.

Vertical integration

EMN has good vertical integration of production streams along the acetyl, polyester, olefins and alkylamines value chains, and economies of scale at its main production sites, particularly its Kingsport, Tennessee facility. In North America, access to low-cost light feedstocks natural gas liquids (NGLs) has supported the company's competitiveness, particularly when compared to heavy-oil-derivative linked chemical production in Europe. With the decline in oil prices, this advantage has contracted; however, Fitch expects it will modestly reflate as oil prices edge up over the next few years. Feedstock dynamics will also be influenced by the wave of pending ethane steam cracker additions on the Gulf coast. While this glut of new cracker capacity is likely to pressure ethylene production margins, downstream units in Eastman's integrated production chain should ultimately benefit.

Hurricane Harvey is likely to add to uncertainties around feedstock dynamics in the U.S. in the near term, but Fitch anticipates the direct impact on Eastman will be limited, especially when compared to peers.

Strong FCF

EMN has a track record of generating strong FCF, driven by the combination of relatively stable through the cycle margins, and low maintenance capex spending requirements. At June 30, 2017, FCF was $440 million, comprised of cash flow from operations of $1.4 billion, capex of $671 million, and dividends of $285 million. EMN's forecast 2017 capex is $575 million and includes 1H spending on a Tritan co-polyester capacity expansion in Kingsport, Tennessee, as well as polyvinyl butryal resin and Crystex expansions in Malaysia.

Moderate but consistent de-levering

Eastman continues to de-lever at a moderate pace following its most recent acquisitions. As calculated by Fitch, at the end of Q2, gross balance sheet debt stood at approximately $7.0 billion, $700 million below the levels seen following the Taminco and Commonwealth Laminate acquisitions. Fitch expects gross debt should end the year at between $6.4 million and $6.5 billion.

Exposure to volatile raw materials

EMN is exposed to volatility in raw materials and energy costs, which can temporarily depress margins due to lags between pricing for feedstocks versus derivatives, and periodically result in sizable working capital swings. Key exposures include propane, paraxylene, natural gas, and methanol. The company's strategies to offset this include hedging; increased vertical integration; and maintaining pricing power. It has been successful to date in offsetting this volatility, as is seen in its consistently positive FCF number.

Portfolio upgrading

EMN's management has actively upgraded its portfolio over the last several years to maximize margins and shed commoditized businesses. Acquisitions include the $4.8 billion Solutia acquisition; $2.8 billion Taminco acquisition; $438 million Commonwealth Laminate and Coating acquisition; and the $238 million BP Aviation gas business acquisition.

Key assumptions

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

  • Annual operating profit growth averaging 5.5 percent over the life of the forecast
  • Capex of $575 million in 2017, and $550 million thereafter
  • EBITDA margin rising from 22.5 percent in 2017 to 23.2 percent by 2020
  • $200 million in incremental acquisitions over the life of forecast
  • Repayment of approximately $350 million in TL debt in 2017, and debt repayments thereafter consistent with reducing leverage to below 2.5x within the rating horizon
  • Annual dividend growth of 9 percent
  • Share repurchases averaging just under $380 million per year over the forecast
  • No ethylene capacity monetization assumed in the forecast.

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