CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Westlake Chemical Corporation's (Westlake) Issuer Default Rating (IDR) and senior unsecured notes at 'BBB-' and its secured revolving credit facility at 'BBB'. The Rating Outlook has been revised to Positive from Stable.
KEY RATING DRIVERS
The Positive Outlook reflects Fitch's expectation that Westlake will successfully complete its large capital projects without material additional borrowings and generate meaningful free cash flow in 2014. The company's credit metrics are expected to remain strong. The ratings incorporate Westlake's strong liquidity, conservative capital structure, and solid operating cash flow generation.
Westlake's capital spending to increase backward integration should reduce exposure to cost pressures. Westlake currently has greater polyvinyl chloride (PVC) production capacity than it has ethylene and chlorine production required to produce PVC, necessitating outside purchases. To capture the margin associated with the purchased chlorine (and gain caustic soda sales), Westlake is currently building a chlorine plant in Geismar, LA, which should be running by the end of 2013. Westlake is in the process of expanding capacity of its ethylene crackers through debottlenecking and a feedstock switch at its Calvert City, KY cracker.
The company's capital spending is expected to decline. Westlake budgeted $390 million to $420 million for the Geismar plant (on track for completion by the end of 2013) and $210 million to $240 million for the Calvert City feedstock switch (2Q'14) and PVC production expansion (end of 2014). The company had incurred $417 million of those costs at June 30, 2013. The company plans to debottleneck a cracker at its Lake Charles, LA facility in 2015 but has no other announced projects. Large capital projects take multiple years to plan, permit, and build.
Westlake's operations, which benefit from low-cost ethane-based feedstock ethylene production, are generating historic highs in operating income and cash profits. Fitch believes Westlake's ethylene production (due to shale oil and gas exploration and production) and electrochemical unit (ECU) production (due to lower electricity costs) will continue to be globally cost advantaged enabling cash generation throughout business cycles.
North American ethane is currently at historic lows due to supply exceeding demand. This supply condition is expected to persist at least in the medium term. Ethane is used primarily as a feedstock for ethylene production and, following a feedstock switch at its Calvert City, KY plant, Westlake will be using only ethane for its ethylene production. Crackers outside North America and the Middle East primarily use naphtha which is an oil derivative and is priced as such. North America's excess ethane production is diverted to the natural gas stream and is providing the pricing basis for ethane. North American natural gas prices, calculated on a barrel of oil equivalent basis, are at a large discount to oil prices.
The company's margins have expanded as raw material costs have become more favorable. For the LTM period ended June 30, 2013, the company had an operating EBITDA margin of 25.6%, an increase of 428 basis points (bps) from 2012 and 959 bps from 2011. This in turn has led to strengthened credit metrics. Total debt-to-operating EBITDA has declined to 0.9x for the LTM period ended June 30, 2013 from 1.0x at 2012 year end. For 2013, Fitch expects Westlake to generate at least $900 million in EBITDA. Free cash flow is expected to be modestly negative in 2013 due to capital expenditures but positive in 2014 and growing in 2015.
Fitch expects the vinyls business, which produces PVC and other vinyl building products, to remain challenged by excess capacity and a weak, though recovering, construction market. New residential construction is a large consumer of PVC. Housing starts have grown from recession lows but are still significantly below average historical starts of roughly 1.5 million annually. As housing rebounds, PVC margins are likely to expand.
Westlake has robust liquidity. At June 30, 2013, the company had a $626 million cash balance, $30 million in short-term investments and $383 million available after utilization of letters of credit under its $400 million ABL revolving credit facility maturing September 2016. The facility has a 1:1 fixed charges covenant at such times that the borrowing availability be less than the greater of (1) 12.5% of commitments and (2) $50 million. With no borrowings under the revolver and fixed charge coverage well in excess of 1x, the company has significant headroom. Westlake has no short- or medium-term debt maturities. The next maturity is the company's $250 million 3.6% senior unsecured notes due 2022.
The company announced it was studying the Master Limited Partnership (MLP) structure after another firm received an IRS Private Letter Ruling permitting crackers to be placed in an MLP. Westlake could potentially spin-off its cracking assets, which are currently its most valuable, since they are benefiting from low-priced ethane. Fitch expects Westlake to maintain a financially conservative capital structure if such a spin-off were to occur.
Fitch would consider a negative rating action should there be a substantial change in the company's strong financial profile whether the result of a sustained cyclical downturn, a sizable leveraged acquisition, a substantial recapitalization or a spin-off without commensurate debt reduction.
Fitch would consider a positive rating action if Westlake is able to successfully complete its capital program aimed at achieving full integration along the PVC production chain, achieve greater product diversity, produce consistent free cash flow generation and maintain a strong financial profile.
Fitch has affirmed Westlake Chemical Corporation's ratings as follows:
--Long-term IDR at 'BBB-';
--Secured bank credit facility at 'BBB';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is Positive.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Rating Chemical Companies,' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Rating Chemical Companies
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage