NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Westlake Chemical Corporation's (Westlake; NYSE: WLK) Issuer Default Rating (IDR) at 'BBB', removed the Rating Watch Negative, and assigned a Stable Outlook. In addition, Fitch has assigned a 'BBB' rating to Westlake's new issuance of senior unsecured notes. The action affects about $2 billion of securities and commitments. A list of rating actions is provided at the end of this release.
The Ratings Watch was removed and a Stable Outlook was assigned to reflect Fitch's expectation that funds from operations (FFO) adjusted leverage will trend toward 2.5x by the end of 2018 on Westlake's efforts to accelerate debt repayments.
KEY RATING DRIVERS
ALL-CASH OFFER FOR AXIALL
In June 2016, Westlake announced that it intends to acquire Axiall Corporation in an all-cash transaction valued at $3.8 billion giving rise to roughly $3 billion in additional debt. Fitch expects FFO adjusted leverage to be above 3x until 2018 when excess free cash flow (FCF) should allow substantial debt repayment. 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.
SIGNIFICANT INDUSTRY EXPANSION
Global ethylene capacity is expected to be nearly 14% higher than 2015 levels by 2018 and capacity builds in the U.S. are expected to account for 40% of that increase. Much of this capacity is expected to be tied to derivative capacity additions which are expected to weigh on integrated margins over the period.
LOW COST POSITION
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. 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 U.S. and ethane/natural gas liquids exports increase in the latter part of this decade. Fitch expects margins for integrated producers to trough in 2018.
COMPLETION OF EXPANSION PROJECTS
Westlake completed a new chlor-alkali plant at the Geismar facility (2013), a PVC expansion at Calvert facility (2014), expanded its Petro 2 ethylene unit at the Lake Charles facility and converted it to 100% ethane feedstock capability (2014), and recently upgraded and expanded its Petro 1 ethylene unit at Lake Charles. The company announced a project to increase ethylene capacity by about 100 million pounds annually at its Calvert City facility planned in the first half of 2017. Fitch expects capital spending to revert to near maintenance levels at Westlake thereafter.
STRONG CASH FLOWS EXPECTED
Driven by resilient margins, modest dividend growth and lower capital requirements, Fitch expects aggregate FCF generation during the years 2016-2018 to be roughly $1 billion. Fitch expects these funds to be applied to debt reduction.
--Axiall acquisition closes Jan. 1, 2017;
--$100 million annual synergies cost $100 million to achieve phased in by the end of 2020;
--Capital expenditures at guidance for 2016 and then below $500 million per year;
--Consolidated sales at about $7.1 billion in 2017 and about $6.9 billion in 2018;
--Consolidated EBITDA margins at about 20% in 2017 and 2018;
--Dividends to grow at 2.5% per annum, distributions to minority interests expected to grow 12% per annum;
--Debt repaid as soon as practicable with excess cash flow and cash on hand;
--$100 million minimum cash on hand;
--No share repurchases while leverage is elevated.
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 through failure to reduce debt and or weaker than expected results.
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.
Strong liquidity supports the Axiall acquisition. At June 30, 2016, cash on hand was $771 million and marketable securities were $352 million. As of March 31, 2016, $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.
Today, Westlake announced that JPMorgan Chase Bank, N.A. has agreed to structure, arrange and syndicate a $1 billion senior unsecured, five year revolving credit facility to replace the current $400 million secured facility.
Westlake has no meaningful maturities until 2022 when its $250 million 3.6% notes are due. Axiall has $688 million in notes due in 2021 and $450 million in notes due in 2023. Westlake has stated that it will exchange these for new Westlake notes with the same coupon and maturity shortly after the acquisition. Fitch expects these to be repaid on an accelerated basis.
Fitch has taken the following rating actions:
--Issuer Default Rating (IDR) affirmed at 'BBB';
--Senior secured ABL facility affirmed at 'BBB';
--Senior unsecured revolving credit facility assigned 'BBB';
--Senior unsecured notes assigned 'BBB'; and
--Senior unsecured notes at affirmed at 'BBB'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS
Fitch has made no material adjustments that are not disclosed within the company's public filings.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form