CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDR) and debt ratings of The Dow Chemical Company (Dow) as follows:
The Dow Chemical Company
--Long-term IDR at 'BBB';
--Senior unsecured revolving credit facility at 'BBB';
--Senior unsecured debt at 'BBB';
--Short-term IDR at 'F2';
--CP ratings at 'F2'.
Dow Capital BV
--Long-term IDR at 'BBB';
--Senior unsecured debt at 'BBB'.
Union Carbide Corporation (Union Carbide)
--Long-term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
Rohm and Haas Company (Rohm and Haas)
--Senior unsecured debentures and notes guaranteed by Dow Chemical at 'BBB'.
The Ratings Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect Dow's position as the largest North American chemical company with approximately $56.5 billion of revenues in the last 12 months (LTM) ending March 31, 2013, its highly integrated production streams, which result in significant economies of scale and scope, and leading market positions in many commodity and specialty chemicals segments. These ratings strengths are partly offset by the moderately levered capital structure, following the Rohm and Haas acquisition, and significant capital spending commitments.
The ratings are constrained by moderate cash flows, particularly when considered in relation to debt. LTM to March 31, 2013, Dow's cash flow from operations totaled $4.6 billion. The company had $20.1 billion of debt and $4 billion of preferred shares at March 31, 2013. Debt covered operating EBITDA (excluding income from affiliates) of $6.8 billion at LTM March 31, 2013 3.0 times (x). Operating EBITDA to gross interest expense was 5.2x for the same period. Dow produced LTM free cash flow of $254 million after $2.6 billion of capital expenditures and $1.8 billion of dividends including preferreds.
Fitch expects the company to improve operating cash flow generation over the next several quarters, given longer-term favorable margin trends resulting from low cost feedstocks and cost reduction from restructuring. Fitch also notes that the company has pulled back on planned capital expenditures (although still relatively large), which should improve free cash flow. This drives Fitch's expectation for Dow being modestly free cash flow positive in 2013. Fitch expects Dow to generally produce material positive FCF in future years.
Global economic growth remains weak and is not expected become significantly more robust in the near term. As such Fitch is not expecting significant revenue growth in Dow's businesses over the same time horizon, with the exception of Dow's Agricultural Sciences segment.
Dow's operating earnings are driven by its Performance Plastics segment which accounted for over 40% of the company's first quarter EBITDA. Dow is one of the largest ethylene and ethylene derivative producers in the world, and roughly 70% of its cracker capacity is located in the cost-advantaged Americas and Middle East. Fitch expects this segment to continue to produce a significant share of Dow's profit. Dow's Agricultural Sciences segment produced over 20% of the company's first quarter EBITDA. Agricultural Sciences' products are weighted heavily toward the first half of the year. Dow has invested heavily in research and development to grow this segment. Fitch anticipates this segment will continue to grow given the licensing agreements Dow has secured.
The company 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 the company'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.
The Stable Outlook reflects Dow's robust liquidity. As of March 31, 2013, Dow's liquidity totaled $9.4 billion, consisting of $3.5 billion cash on hand, $5.9 billion available under its undrawn $5 billion five-year revolving credit facility, three bilateral revolving facilities, and $300 million term loan subsequently drawn on April 5, 2013. The five-year facility is governed by a debt to capital covenant maximum of 65%. The covenant is only applicable, if more than $500 million are outstanding under the facility. Dow's total indebtedness to consolidated capitalization as defined in the revolving credit facility agreement at March 31, 2013 was 45%, providing the company with adequate cushion if it carried a balance above $500 million on the revolver. The five-year revolver will expire in October 2016.
Dow received its $2.2 billion cash payment from Petrochemical Industries Company of Kuwait related to the K-Dow arbitration resolution on May 7, 2013 adding to its significant cash position. Fitch expects a significant portion of the proceeds will be used to repay debt given the company's stated priority to reduce debt balances.
The company's robust liquidity makes upcoming debt maturities manageable. Dow has maturities of $0.5 billion remaining in 2013, $0.7 billion in 2014, $1.7 billion in 2015, $1.1 billion in 2016, and $1.2 billion in 2017. Another risk mitigant is the company's proven ability to execute sizeable capital markets transactions to refinance debt as necessary.
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 still sizeable exposure to asbestos litigation.
The rating of the Rohm and Haas' notes and debentures is based on the unconditional and irrevocable guarantee from Dow Chemical.
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 strengthen Dow's free cash flow generation.
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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Chemical Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
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=791995
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