Westlake Chemicals rating outlook at stable: Fitch

Westlake Chemicals rating outlook at stable: Fitch

9:41 AM, 11th July 2019
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NEW YORK, US: A report from Fitch Ratings Inc states that it has assigned a rating of 'BBB' rating to Westlake Chemical Corporation's €700 million senior unsecured note issuance. The rating outlook is stable. The proceeds will be used for general corporate purposes.

Fitch expects the new issue to result in total debt/EBITDA above 2.0x through 2020, but below 2.0x by the end of 2021. Westlake's ratings reflect the company's competitive cost structure, strong free cash flow generation, generally moderate leverage and substantial liquidity.

Key Rating Drivers

Low Cost Position: Westlake benefits from access to advantaged natural gas liquids based ethylene feedstocks, which have historically maintained a cost advantage over naphtha based ethylene feedstocks. Low natural gas prices also benefit vinyl production given relatively low electricity costs. Westlake continues to benefit from integration into both chlor-alkali and ethylene, supporting the margins of their vinyls segment. Fitch expects EBITDA margins to decline to about 18% in 2019 on lower caustic, polyvinyl chloride (PVC) and polyethylene prices. Fitch expects margins to improve gradually to about 23% by the end of 2021 as markets become more balanced.

Ethylene/Polyethylene Supply Expansions: Some of the wave of new ethylene and polyethylene supply slated to come on line in 2017-2019 in North America was delayed; however, Fitch expects ethylene margins to remain weak through 2019 and polyethylene margins to trough in 2020. Virgin plastics demand benefits from above GDP level growth and China's ban on imported plastic scrap, although the current trade friction between the U.S. and China has resulted in overstocking in the U.S. Fitch expects the current wave of polyethylene supply additions to be absorbed in 2021-2022.

In contrast, additions in the PVC/chlor-alkali chain are expected to be modest compared to demand growth, which should tighten caustic soda prices by the end of 2019.

Deleveraging Capacity: Fitch expects leverage to decline with earnings growth and debt repayment through 2021. Fitch expects Westlake's 2019 EBITDA to be about $1.5 billion and gradually recover to about $1.9 billion by the end of 2021. Fitch expects Westlake to generate at least $300 million in FCF per year after dividends and distributions to Westlake Chemical Partners LP (WLKLP). The company's next maturity is the $250 million, 3.0% senior notes due July 15, 2022.

Growing Shareholder Returns: Westlake's capital allocation has been fairly balanced, and Fitch notes that there were no share repurchases between the acquisition of Axiall Corporation in August 2016 and Sept. 30, 2018. The company repurchased $106 million of shares in 4Q18 following $1.5 billion in debt repayments in 2017 and 2018.

From January 2014 through 1Q19, Westlake paid $522 million in dividends, repurchased stock in an aggregate amount of $389 million and distributed to $115 million to minority holders of WLKLP. Proceeds from common unit offerings in WLKLP were $460 million over the same period and FCF aggregated $2.4 billion.

LACC Cracker Optionality: The joint venture with Lotte Chemical USA Corporation will give Westlake additional ethylene capacity of 200 million pounds per year at the current 10% interest with an option to increase ownership to 50% for a total of 1 billion pounds a year. Westlake is short ethylene and has benefitted from low priced merchant production. The option expires three years after completion. The facility opened on May 9, 2019.

Key Assumptions

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

  • Consolidated EBITDA margins about 18% in 2019 increasing to about 23% in 2021;
  • Distributions to minority interests expected to grow about 25% per year;
  • Capital expenditures average about $660 million per year through 2021;
  • $250 million notes due 2022 called in 2020;
  • Share repurchases suspended during periods of elevated leverage.

The rating outlook is positive.

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