CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Methanex Corporation's (Methanex) long-term Issuer Default Rating (IDR), revolving credit facility and senior unsecured notes ratings at 'BBB-'. The Rating Outlook is Stable.
KEY RATING DRIVERS
Methanex's ratings reflect the company's position as the largest supplier of methanol, its global distribution network, relatively low production costs within the industry, increased geographical diversification, operating leverage to the wide oil-natural gas spread, and conservative financial management. Rating limitations include the company's single-product focus, planned capital expenditures relating to its relocation of Chilean capacity to Geismar, Louisiana, and output constraints facing its remaining Chile plants.
Methanex's margins have benefited from advantageous methanol pricing. Methanol prices have been supported by energy-related uses linked to Brent crude pricing, significant and growing Chinese demand, and rational industry capacity. Fitch anticipates these factors to continue to support methanol prices. Methanex's margins are expected to benefit further when they are able to capture the operating margin from Geismar-produced methanol. Methanex's Geismar facility will be able to benefit from low-priced natural gas which is expected to prevail for the near-to-intermediate term due to the North American shale boom. Natural gas is the feedstock and largest cost item for Methanex's methanol production process. In addition, since issues in Chile first erupted, the company has ramped up production in several other locations including Egypt, New Zealand, and Medicine Hat. On a pro forma basis following the relocation of two plants to Geismar, Fitch anticipates less than 20% of the company's nameplate capacity will be in Chile, versus a level as high as 56% in 2009.
Methanex's Chilean plants have been underutilized for a number of years due to the disruption of natural gas imports from Argentina. Methanex has supplemented lost volumes with higher levels of purchased and commissioned methanol sales, but margins on these sales are significantly lower than on Methanex's own production. To address this, the company is in the process of dismantling two plants capable of producing one million tonnes per year each, relocating them to Geismar and reassembling them. While the relocation will save the company substantially in comparison to greenfield plants, Methanex expects to spend approximately roughly $1 billion relocating both plants.
The company's credit statistics have improved in 2013 as methanol prices have increased year over year. As calculated by Fitch, Methanex's debt/EBITDA decreased from 2.7x in 2012 to 1.9x at Sept. 30, 2013. For the latest 12 months (LTM) ending Sept. 30, 2013, Fitch-calculated EBITDA/gross interest was 10.3x and funds from operations interest coverage was 9.2x, versus 6.8x and 7.6x in 2012. Free cash flow (FCF) has been neutral with $8 million in the LTM period ended Sept. 30, 2013. While cash from operations has been strong, capital expenditures have increased substantially with the plant relocations, the restart at Waitara Valley and debottenecking at Montunui and Medicine Hat. Fitch expects negative FCF in 2014 as the bulk of capital spending occurs for the plant relocations with a return to positive FCF in 2015 as Geismar begins producing methanol at the end of 2014. Methanex estimated at Sept. 30, 2013 that it will spend a further $780 million for the Geismar relocations.
Fitch notes that Methanex's contracts with gas suppliers offer a measure of downside protection for creditors - contracts at several of the company's methanol plants allow Methanex to pay low base natural gas prices but share the upside with natural gas suppliers when methanol prices rise above certain levels. From a creditor perspective, this helps the company by lowering its cost structure under depressed methanol pricing conditions. Supply contracts with this structure include Egypt, Trinidad, New Zealand and United States agreements.
Methanex has a substantial liquidity position totaling $1.1 billion with $686 million in cash and an undrawn $400 million revolver which expires December 2016. The company has a light maturity schedule with only amortizations of its limited recourse project financing its $150 million 6% notes mature on Aug. 15, 2015. Financial covenants contained in the company's debt structure include a debt-to-capitalization ratio and minimum interest coverage ratio (revolver). The company also has a limitation on secured debt (contained in the revolver and notes outstanding).
The company's cash position will be further helped by a cash infusion from its sell down of its stake in EMethanex. Methanex will retain its controlling position with a slightly greater than 50% stake while realizing $110 million in cash proceeds. Fitch views this sale as credit positive with Methanex able to reduce exposure to Egypt and gain cash cushion for its large capital program.
Positive: Future developments that could lead to positive rating actions include:
--Increased product diversification;
--Successful relocation and restart of Chilean plants in Geismar coincident with attractive methanol prices supported by positive demand trends.
Negative: Future developments that could lead to negative rating actions include:
--Sustained period of methanol overcapacity depressing pricing and margins;
--A leveraging transaction moving debt to EBITDA above 3.5x on a sustained basis;
--Large share repurchases or special dividends financed by debt.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (August 2013);
--'Rating Chemical Companies' (August 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Chemical Companies