Fitch Affirms Eastman Chemical's Long-Term IDR at 'BBB'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR) and senior unsecured debt ratings of Eastman Chemical at 'BBB'. This action follows Eastman Chemical's announcement that it plans to acquire Taminco Corporation (NYSE:TAM) in a debt financed $3 billion transaction. In addition, Fitch has affirmed Eastman's short-term IDR and commercial paper rating at 'F2. The Rating Outlook for Eastman is Stable.

KEY RATING DRIVERS

The affirmation is based upon expectations of pro-forma debt/EBITDA declining and strong free cash flow after capital expenditures and dividends post-closing of the transaction. Pro-forma debt/EBITDA is expected to rise to approximately 3 times immediately after closing of the acquisition and should be trending down in 2015 and 2016 from debt repayment from free cash flow generation. Free cash flow after capital spending and dividends is expected to be approximately $1.5 billion over the next two of years.

The ratings reflect Eastman's diversity of chemical products, strong market positions in key end user markets, vertical integration of production along its acetyl, polyester and olefin product chains, access to low cost North American feedstocks and consistent operating results coupled with relatively conservative financial strategy.

THE TRANSACTION

Eastman has agreed to acquire Taminco which is a global specialty chemical company producing alkylamines for various end market uses including Agriculture (crop protection), Personal & Home Care, Water Treatment, Animal Nutrition and Energy. The acquisition is for approximately $3 billion inclusive of assumed debt. As a result of the transaction, Eastman's balance sheet debt is expected to increase to approximately $7.8 billion from nearly $4.8 billion as of June 30, 2014. Taminco's LTM EBITDA ending June 30, 2014, was approximately $250 million while Eastman's LTM EBITDA was approximately $2.3 billion for the same period.

The acquisition has been approved by the Boards of Directors for both companies, is subject to certain conditions, including 30-day 'go shop' period for potential alternative proposals, required regulatory approvals and customary closing requirements. Taminco's majority stockholder has agreed, subject to certain conditions to vote its shares of Taminco's common stock in favor of the transaction which is expected to close by the end of 2014.

FCF and EXPECTATIONS

Eastman's debt/EBITDA was 2.1x as of June 30, 2014. Fitch expects debt/EBITDA for Eastman will decrease to 2.0x - 2.5x by the end of 2016, primarily driven by debt reduction from free cash flow (FCF). As stated above, FCF after capital expenditures and dividends is expected to be approximately $1.5 billion over the course of 2015 and 2016. As a point of comparison, Eastman's stand-alone FCF in 2012 and 2013 was a combined $1.14 billion after capital expenditures and dividends.

LIQUIDITY

Liquidity is provided by an undrawn $1 billion unsecured credit facility (due Oct. 2018) and a $250 A/R securitization facility also undrawn as of June 30, 2014. The credit facility backstops Eastman's commercial paper program. Near-to intermediate term maturities are $250 million due in October of 2015, $1 billion due June 2017 and $160 million due November 2018.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

--Total debt to EBITDA of 1.5x on a mid-cycle basis in combination with maintenance of annual FCF over $500 million.

Negative: Future developments that could lead to negative rating actions include:

--Debt/EBITDA above 2.5 times on a sustained basis;

--Sustained negative FCF leading to incremental borrowings;

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

--A major operational issue or global recession which pushes EBITDA lower on a sustained basis and is not offset by adjustments in Eastman's cost structure.

Fitch affirms Eastman's ratings as follows:

--Long-term IDR at 'BBB';

--Senior unsecured revolving credit facility at 'BBB';

--Senior unsecured notes/debentures at 'BBB';

--Short-term IDR at 'F2';

--Commercial Paper at 'F2'.

The Rating Outlook is Stable.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 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=870474

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Contacts

Fitch Ratings
Primary Analyst
Sean T. Sexton, CFA, +1-312-368-3130
Managing Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Mark C. Sadeghian, CFA, +1-312-368-2090
Senior Director
or
Committee Chairperson
Eric C. Ause, CFA, +1-312-606-2302
Senior Director
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Sean T. Sexton, CFA, +1-312-368-3130
Managing Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Mark C. Sadeghian, CFA, +1-312-368-2090
Senior Director
or
Committee Chairperson
Eric C. Ause, CFA, +1-312-606-2302
Senior Director
or
Media Relations, New York
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com