Westlake rating outlook at stable: Fitch

Westlake rating outlook at stable: Fitch

6:05 AM, 22nd November 2017
Westlake Chemical logo

NEW YORK, US: A report from Fitch Ratings Inc states that it has assigned a 'BBB' rating to Westlake Chemical Corporation's (WLK) reoffering of $250 million unsecured revenue bonds due 2032.

Proceeds from the revenue bonds, together with cash on hand, credit facility borrowings, and the recent $500 million unsecured notes issuance, will be used to fund the redemption of the $688 million 2021 and $450 million 2023 senior unsecured notes on or after Feb 15, 2018 and May 15, 2018, respectively. The revenue bonds will rank pari passu with Westlake's existing unsecured debt.

Management intends to temporarily fund a portion of the redemption with the credit facility and repay borrowings with excess cash flows. The transaction is expected to help lower interest costs, reduce gross debt, improve leverage metrics, and further extend the maturity profile.

Key rating drivers

Axiall acquisition adds volumes, synergies: The Axiall acquisition gives Westlake the ability to maximize integration from ethylene production through PVC and add scale to the company's PVC resin and vinyl-based building products. Additionally, the joint venture with Lotte Chemical USA Corporation allows Westlake to add additional ethylene capacity of at least 220 million pounds a year with an option to increase ownership interests to 50 percent for a total of 1.1 billion pounds a year. Westlake has achieved significant synergies thus far and management expects to realize $120 million in synergies in 2017 with expectations to reach up to a total of $200 million by 2018.

Cash flows facilitate deleveraging: Following the Axiall acquisition, Westlake's leverage remains elevated but Fitch expects the company will generate strong free cash flow (FCF) that will be used to reduce debt and return leverage metrics to levels more consistent with the rating category over the next 12 to 24 months. The announced transaction reiterates management's intentions to reduce gross debt.

Low-cost position: Westlake benefits from access to advantaged natural gas liquids-based ethane feedstocks, which have historically maintained a cost advantage over naphtha-based feedstocks, although the oil price drop has reduced margins. Westlake continues to benefit from their integration in both chlorine and ethylene, supporting the margins of the vinyls segment. Fitch recognizes the risk that the feedstock cost advantage enjoyed by many North American chemical companies could be reduced over time as additional ethane crackers are built in US and ethane/natural gas liquids exports increase in the latter part of the decade.

WLKP offers additional liquidity source: On Jan19, 2017, the IRS issued final regulations that affirmed the production, transportation, storage and marketing of ethylene as a master limited partnership qualifying income stream, resolving prior uncertainty. Westlake Chemical Partners LP (WLKP) provides Westlake with the ability to monetize its existing ethylene assets at attractive valuations and use the proceeds to reduce debt as well as fund operations and make strategic investments. Fitch believes Westlake has an adequate inventory of dropdowns to support distributable cash flow growth at WLKP.

Key assumptions

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

  • Consolidated EBITDA margins trending towards 20 percent in 2020;
  • Dividends to grow at 5 percent per annum, distributions (WLKP) to minority interests expected to grow at a double-digit rate;
  • Capital expenditures of $600 million for 2017 and then returning to normalized levels as major projects are completed;
  • Debt repaid as soon as practicable with excess cash flow and cash on hand;
  • No share repurchases over the forecast.

The rating outlook is stable.

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