Fitch Places Westlake Chemical's 'BBB' Ratings on Ratings Watch Negative

NEW YORK--()--Fitch Ratings has placed Westlake Chemical Corporation's (Westlake; NYSE: WLK) 'BBB' ratings on Ratings Watch Negative following Westlake's announcement that it intends to acquire Axiall Corporation in an all-cash transaction valued at $3.8 billion. The rating affects $650 million of notes and commitments. A full list of Westlake's current ratings follows at the end of this release.

KEY RATING DRIVERS

The Ratings Watch reflects Fitch's expectation that FFO adjusted leverage could be above 2.5x over the ratings horizon absent equity issuance.

Fitch recognizes that the combination of Westlake and Axiall would provide opportunities to maximize integration from ethylene production through polyvinyl chloride (PVC) and add scale to Westlake's PVC resin and vinyl-based building products.

The ratings benefit from strong earnings and cash flow, steady supply/demand fundamentals for olefins and vinyls.

While the oil price drop has cut into margins, Westlake continues to benefit from low feed stock prices, particularly ethane. EBITDA margins remain above 25% (since 2013) compared to approximately 16% in 2011 and prior. As a result of strong margins and selective expansion, earnings and cash flow have been robust and total debt/EBITDA has been under 1x and FFO Adjusted Leverage has been under 2x.

Fitch recognizes the risk that the current feedstock cost advantage enjoyed by many North American chemical companies could be reduced over time as additional ethane crackers get built in the US and ethane/natural gas liquids exports increase in the latter part of this decade. In addition, the PVC industry can be leveraged to construction, in particular residential construction. Westlake is somewhat insulated given backward integration.

KEY ASSUMPTIONS

--Additional debt post close of $2.6 billion reflecting the purchase of Axiall's equity at roughly $2.3 billion, assumed debt of roughly $1.4 billion net of a portion of cash and marketable securities on hand at March 31, 2016 of $1.1 billion at Westlake and $200 million at Axiall;

--Annual EBITDA of $1.6 billion on average;

--Capital expenditures below 7% of revenues on average;

--Dividends grow at 10% per annum;

--Distributions at the MLP grow at roughly 3% per quarter;

--No share repurchases while leverage is elevated.

RATING SENSITIVITIES

Fitch anticipates resolving the ratings watch following an evaluation of the expected capital structure and cash flows of the combined entity.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Failure to achieve timely integration and synergies;

--Total Debt/EBITDA significantly above 2.0x on a sustained basis;

--FFO Adjusted Leverage of 2.5x or higher on a sustained basis;

--Leveraging events: debt financed share repurchases, leveraged acquisitions, etc.

Positive: Not anticipated at this time but future developments that may help to lead to a positive rating action include:

--Achieving greater product diversity;

--Substantially increased size and scale.

LIQUIDITY

At March 31, 2016 cash on hand was $615 million and marketable securities were $525 million; and $355 million was available under the company's $400 million secured revolving credit facility after $30.8 million letters of credit. The facility matures in July 2019 and is subject to a borrowing base comprised of receivables, inventory and cash. The credit facility has a covenant stating the Company must maintain a minimum fixed-charge coverage ratio of 1.0:1.0 for successive 30 day periods after any date on which the borrowing availability under the facility is less than or equal to the greater of (1) 10% of the commitments under the facility and (2) $40 million, until the borrowing availability exceeds the greater of the amount in clause (1) and the amount in clause (2) for a 30-business day period. Fitch assumes that Westlake will seek to upsize and extend its revolving credit facility in connection with the acquisition.

Westlake has no meaningful maturities until 2022 when its $250 million 3.6% notes are due.

As of March 31, 2016, $88 million remains under the share repurchase program approved in Nov, 2014. Since 2010, the company has increased its annual dividends per share by at least 10%.

Fitch has placed the following ratings on Ratings Watch Negative:

Westlake Chemical Corporation

--Long-Term Issuer Default Rating (IDR) 'BBB';

--Senior secured ABL facility 'BBB';

--Senior unsecured notes 'BBB'.

Additional information is available on www.fitchratings.com.

In accordance with Fitch's policies the Issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS

Fitch has made no material adjustments that are not disclosed within the company's public filings.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006009

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Contacts

Fitch Ratings
Primary Analyst
Monica M. Bonar
Senior Director
+1-212-908-0579
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Gregory Fodell
Associate Director
+1-312-368-3117
or
Committee Chairperson
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Monica M. Bonar
Senior Director
+1-212-908-0579
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Gregory Fodell
Associate Director
+1-312-368-3117
or
Committee Chairperson
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com