NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to Dow Chemical Company's (NYSE: Dow) proposed $2 billion new senior unsecured notes with 10, 20 and 30 year maturities. The proceeds will be used to repay debt and for general corporate purposes. A complete list of ratings is provided at the end of this release.
The Ratings Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect Dow's position as the largest North American chemical company, its highly integrated production streams driving significant economies of scale and scope, and leading market positions in many commodity and specialty chemicals segments. The ratings also reflect moderate financial leverage and strong liquidity.
Dow's operating earnings are dominated by its Performance Plastics segment, accounting for over 45% of the company's first half operating segment EBITDA. Dow is one of the largest ethylene and ethylene derivative producers in the world, with roughly 70% of its cracker capacity located in the cost-advantaged Americas and Middle East. Dow is benefiting from low cost feedstocks in North America which result from the natural gas and liquids boom. Fitch expects this segment to continue to produce a significant share of Dow's profit.
LEVERAGE
Dow's funding of its April 2009 Rohm and Haas Co. acquisition with $12 billion of debt (acquisition financing and assumed debt) in combination with the recession led to greater than historic leverage in 2009 and 2010. Dow has reduced debt levels from $23.8 billion reported June 30, 2009 to $19.8 billion at June 30, 2014 pro-forma for the new issue.
Dow has $4 billion of preferred shares outstanding with a coupon of 8.5%. The shares were issued as part of the Rohm and Haas acquisition financing. The shares are convertible to common at Dow's discretion once the common shares close above $53.72/share for 20 days in a 30 trading day window. The shares are considered debt-like but have not been included in Fitch's gross debt calculation. Fitch expects Dow to force conversion to common stock as soon as possible.
Dow generated $7.2 billion of operating EBITDA in the LTM period ended June 30, 2014 resulting in pro forma total debt to operating EBITDA of 2.8x. In the period, Dow generated $7.3 billion in cash from operations and free cash flow (FCF) after capital expenditures and dividends of $2.4 billion.
Fitch expects cash from operations will be strong again in 2014. Free cash flow generation is expected to be under pressure from the company's planned capital expenditures. Capital expenditure for 2014 is expected to be $3.3-$3.5 billion compared to $2.5 billion in 2013. Dividends are also expected to be higher due to four full quarters in 2014 (2013's first quarter dividend was pulled into 2012) and a 15% dividend per share increase earlier this year. Fitch believes FCF could be modestly negative in 2014.
Dow has announced expansions of its North American ethylene and propylene capacity in order to take advantage of low feedstock costs. These expansions are expected to increase Dow's capital expenditures over the next few years. However, the risks are mitigated by opportunities in domestic and export markets for Dow's downstream products, which likely offer good margins and competitive advantages from low feedstock costs.
Dow plans to repurchase a further $2.1 billion of shares in the second half of 2014. The gross share repurchase amount will be partially offset by share issuance as part of employee compensation. Dow also plans for large divestitures and while the timing of these is uncertain, Fitch expects Dow to be successful in finding buyers. Those proceeds will also add to cash balances
LIQUIDITY
Dow has strong liquidity. Pro forma for the issuance, Dow had $5.8 billion in cash at June 30, 2014, of which, $1.7 was held by subsidiaries in foreign countries. As of June 30, 2014, no commercial paper was outstanding and $6.2 billion available under its undrawn $5 billion five-year revolving credit facility and seven bilateral committed revolving facilities. The five-year facility, which expires October 2016, is governed by a debt to capital covenant maximum of 65% when borrowings are greater than $500 million. At June 30, 2014, Dow's debt to capital was 38%, providing the company with adequate cushion.
At Dec. 31, 2013, maturities of long-term debt were $697 million in 2014, $407 million in 2015, $1,366 million in 2016, $775 million in 2017 and $930 million in 2018. Dow does not face any large towers of debt relative to its cash from operations until the company's 2019s are due. Approximately $2.1 billion of the 2019s are outstanding.
STRUCTURAL CONSIDERATIONS
Dow senior unsecured notes do not benefit from upstream guarantees and are structurally subordinated to $3.6 billion of subsidiary indebtedness as of June 30, 2014.
Union Carbide is a wholly-owned subsidiary of Dow Chemical, and its rating is based on the high degree of financial, legal and business integration into Dow's operations. While the close integration would justify equalizing the rating, the one notch rating difference reflects Union Carbide's continuing exposure to asbestos litigation. Union Carbide has $483.1 million of notes outstanding.
The rating of the Rohm and Haas' notes and debentures is based on the unconditional and irrevocable guarantee from Dow Chemical. Rohm and Haas has $1.2 billion in notes and debentures, of which, the 7.86% senior note due 2029 in the amount of $773.9 million is not guaranteed by Dow and not rated by Fitch.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Material progress in deleveraging the balance sheet including redemption of high coupon preferred shares;
--Operating performance improvements and capital spending discipline which generates consistent positive FCF;
--Total debt to operating EBITDA of 2x.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--A sustained return of adverse economic conditions for the chemical industry leading to weak sales and profits;
--Expectations for prolonged meaningful negative FCF;
--Total debt to operating EBITDA of more than 3x.
Fitch currently rates Dow as follows:
The Dow Chemical Company
--Long-term IDR 'BBB';
--Senior unsecured revolving credit facility 'BBB';
--Senior unsecured debt 'BBB';
--Short-term IDR 'F2';
--CP ratings 'F2'.
Dow Capital BV
--Long-term IDR 'BBB';
--Senior unsecured debt 'BBB'.
Union Carbide Corporation (Union Carbide)
--Long-term IDR 'BBB-';
--Senior unsecured debt 'BBB-'.
Rohm and Haas Company (Rohm and Haas)
--Senior unsecured debentures and notes guaranteed by Dow Chemical 'BBB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014);
--'Rating Chemical Companies' (August 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Rating Chemical Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682313
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=868194
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