Fitch Affirms Eastman Chemical’s LT 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 Co. (Eastman) at ‘BBB’, and its short-term IDR and commercial paper rating at ‘F2’. The Rating Outlook for Eastman is Stable.

KEY RATING DRIVERS

Company Profile

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, strong operating margins. The consolidated operating EBITDA margin for the latest 12 months (LTM) ended June 30, 2015 was 23%.

Taminco Acquisition

In December 2014, Eastman acquired Taminco Corp., 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 Taminco business lines will further diversify Eastman’s customer base into attractive bio-centric markets while leveraging Eastman’s technology and feedstock advantages. Cost and revenue synergies that are expected to grow to approximately $60 million should improve already strong margins.

The acquisition added approximately $3 billion in debt to Eastman’s balance sheet and increased leverage to over 3.5x at the end of 2014. Since then, the company has repaid a net $200 million in debt, with plans of repaying another $800 million by the end of 2016.

In addition, the acquisition of the BP Global Aviation Turbine Oil business, Commonwealth Laminating & Coating, Inc, and Knowlton Technologies, LLC, all completed in 2014, will broaden the company’s product portfolio and improve earnings starting in 2015.

FCF and EXPECTATIONS

Eastman plans to repay an additional $800 million by the second half of 2016, primarily through free cash flow (FCF) generation. Fitch expects FCF after capital expenditures and dividends to be approximately $650 million in 2015 and total $1.5 billion over the course of 2015 and 2016. Fitch expects that debt/EBITDA for Eastman will decrease to under 2.5x as the company’s robust and growing FCF should allow for additional repayment over the next 18-24 months.

LIQUIDITY

Liquidity is provided by an undrawn $1.25 billion unsecured credit facility (due Oct. 2019). The credit facility backstops Eastman’s commercial paper (CP) program, and there was $858 million available due to $392 million of CP outstanding as of June 30, 2015. Total liquidity is $1.1 billion including $268 million of cash on the balance sheet. The company also has a $250 million A/R facility that typically provides additional liquidity, but it was fully drawn as of June 30, 2015. Near- to intermediate-term maturities are $250 million due in October 2015, $1 billion due June 2017, and $160 million due November 2018.

KEY ASSUMPTIONS

Fitch’s key assumptions within our rating case for the issuer include:

–Revenue of just over $10 billion;

–2015 capex at guidance of $700 million-$725 million;

–EBITDA margin at 23% as lower costs and synergies from acquired businesses flow through and are accretive to earnings;

–Repayment of an additional $800 million of debt ($1 billion total since acquisition) by second half of 2016.

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 2.5x on a sustained basis;

–Sustained negative FCF leading to incremental borrowings;

–Leveraging events: debt-financed share repurchases, additional leveraging 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.

FULL LIST OF RATING ACTIONS

Fitch has affirmed Eastman as follows:

–Long-term IDR at ‘BBB’;

–Senior unsecured revolving credit facility at ‘BBB’;

–Senior unsecured notes/debentures/term loan at ‘BBB’;

–Short-term IDR at ‘F2’;

–CP at ‘F2’.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990217

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Fitch Ratings
Primary Analyst:
Greg Fodell, +1-312-368-3117
Associate 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:
Michael Weaver, +1-312-368-3138
Managing Director
or
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New York
alyssa.castelli@fitchratings.com