NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the long-term Issuer Default Rating (IDR), senior unsecured note rating and revolving credit facility (RCF) rating of NewMarket Corporation (NewMarket) to 'BBB' from
'BBB-'. The Rating Outlook on is Stable.
KEY RATING DRIVERS
The upgrade reflects Fitch's view that the stability of the company's businesses and profits combined with conservative financial policies are consistent with a 'BBB' rating even though EBITDA is expected to remain under $500 million over the medium term.
NewMarket Corporation is one of four large producers of petroleum additives. Automobiles, trucks and heavy industrial equipment are the largest consumers of its lubricant additives and fuel additives. Close customer relationships, lengthy qualification processes and the high cost of product failure form barriers to entry.
Principal customers are major multinational oil companies in the lubricant and fuel industries. Sales to Royal Dutch Shell plc and its affiliates were 11% of consolidated revenues for 2014.
Industry volume growth is determined by fleet size and other factors, which tend to grow in line with global industrial activity. Product prices will generally pass through fluctuations in raw material costs. The volume of the additive is quite small relative to the overall product, while the impact to performance is critical, allowing for pricing power.
NewMarket's EBITDA margins have ranged in the mid-teens to 20% over the past five years with low-margin quarters followed by higher margins as costs are passed through. EBITDA margins are currently at the high end of that range and Fitch expects margins to drop to about 17.5% on average.
Capital expenditures are expected to be between $100 million and $140 million in 2015, including spending on a new facility in Singapore. Capex in 2016, 2017 and 2018 is expected to average at $150 million per year. Modest capital expenditures compare with LTM Sept. 30, 2015 research and development expenditure of $154 million.
The company issued a special dividend aggregating $335 million in 2012 and repurchased $249 million in common shares in 2014. The company's board of directors authorized in October 2015 the repurchase of up to $500 million of shares until Dec. 31, 2018. Roughly $181 million of shares have been repurchased in the year through Sept. 30, 2015 under the prior program. Fitch expects excess cash flow to be returned to shareholders absent acquisitions.
Fitch's key assumptions within the rating case for NewMarket include:
--Sales growth of 2.5% per year on average;
--EBITDA margins of 17.5% on average;
--Capital expenditures include Singapore plant spending.
Positive: Future developments that could lead to positive rating actions are not expected but would include:
--Additional diversification and scale with no deterioration in profitability or capital structure.
Negative: Future developments that could lead to negative rating actions include:
--Significant industry capacity additions leading to overcapacity which would weigh on operating margins;
--Debt-to-EBITDA approaching 2.0x on a sustained basis;
--Leveraging shareholder-friendly transactions: additional special dividends, outsize share repurchases, dilutive acquisitions, etc.
Cash flow after capex and ordinary dividends is expected to exceed $40 million per year. At Sept. 30, 2015 cash on hand was $110 million, with $489 million available under the $650 million revolver due 2019. The facility has a maximum leverage covenant of 3.5x and a minimum interest coverage covenant of 3.0x. Fitch expects the company to be well in compliance with its covenants. The other debt maturity is the $350 million note due in 2022.
CONSERVATIVE CAPITAL STRUCTURE
NewMarket's debt-to-EBITDA has stayed within its target range of 1.0x to 1.5x for a number of years, with the exception of 2008 when leverage was 1.65x. Fitch expects leverage to be below 1.5x on average, and not above 2.0x for more than four quarters.
FULL LIST OF RATING ACTIONS
Fitch upgrades the following:
--IDR to 'BBB' from 'BBB-';
--Senior unsecured revolving credit facility to 'BBB' from 'BBB-';
--Senior unsecured notes to 'BBB' from 'BBB-'.
Additional information is available at www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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