Fitch: Robust Liquidity Continues for North American Chemical Industry

NEW YORK--(BUSINESS WIRE)--Despite challenging conditions over the past two years, liquidity continues to be robust for the North American chemical industry as a whole and for most individual companies, according to a new report issued today by Fitch Ratings. The severity and duration of the recent credit contraction, coupled with the collapse of demand in key end-user markets for chemical products, adversely affected chemical companies globally. Against the backdrop of the strengthening economic recovery, chemicals companies are expected to fund working capital and investment requirements to ramp-up production to levels that meet the gradually increasing demand for chemical products across multiple end markets.

With industry prospects becoming brighter on the back of strong demand in emerging markets and improving momentum in developed markets, Fitch expects that liquidity will face a different set of challenges than during the downturn. The ramp-up of production to meet increasing demand, particularly in emerging economies, will trigger higher working capital requirements that will reduce the companies' operating cash flow. Rising raw material and energy costs, or possibly a price spike, that outpace the speed of the demand recovery could squeeze margins and accelerate cash outflows further.

Companies that scaled back, delayed, or canceled capital-intensive projects in order to reduce capital expenditures during the recession, often to maintenance levels, will increase their capital spending levels in order to support the production growth anticipated during the upswing. At the same time, companies will likely increase or at least maintain dividends, which will further reduce cash flows available for debt reduction. Fitch notes that most chemicals companies kept their dividends at high levels during the downturn.

While these impacts are expected to reduce the chemical companies' free cash flow in 2010 and beyond, Fitch also anticipated additional cash outflow in relation to increasing merger and acquisition (M&A) activities as well as some meaningful shareholder-friendly initiatives such as share repurchases that would further reduce the chemicals companies' cash flow that is actually available for debt service.

Although many issuers already extended their maturity profiles through high debt issuances - $18.6 billion for the chemicals industry as a whole in 2009 - some companies, mostly high yield names, still face significant upcoming debt maturities, particularly in the 2012-2014 timeframe. This is specifically the case for companies with capital structures created through leveraged buyouts (LBOs) or that recently completed debt-financed acquisitions. Fitch expects that these companies will at least partly rely on refinancings in the bank and public debt markets in order to address these maturities.

The special report, 'Liquidity Focus 2010: North American Chemicals' is available at 'fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

Related Research: Liquidity Focus 2010: North American Chemicals

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