Fitch: Corning’s ‘BBB+’ Ratings Unaffected by Strategic Realignment of Dow-Corning
By Business Wire News
By Business Wire News
Fitch Ratings believes that the ratings for Corning Incorporated (Corning), including the ‘BBB+’ long-term Issuer Default Rating (IDR), are unaffected by Corning’s exchange of its shares in Dow Corning Corporation (Dow Corning), a joint venture with Dow Chemical Company (Dow). A full list of current ratings for Corning follows at the end of this release.
Corning announced this morning the exchange of its shares in Dow Corning for the shares of a wholly owned Dow Corning entity, which holds shares in Hemlock Semiconductor (Hemlock), and $4.8 billion in cash, bolstering liquidity. In connection with the tax-free exchange, Corning retained a 40.25% interest in Hemlock, maker of polysilicon for semiconductors and solar panels, which more closely aligns with Corning’s core technology and manufacturing platforms.
Fitch believes Corning is likely to use cash in the new entity to help fund the company’s capital allocation plan (the Plan) updated on Oct. 27, 2015. The Plan includes investing approximately $10 billion to maintain technology and market leadership through 2019 and returning more than $10 billion to shareholders, including a $1.25 billion accelerated share repurchase (ASR) program that commenced in the current quarter. In connection with the Plan, Corning raised its target total leverage (total debt-to-operating EBITDA) to 2x from 1.5x and lowered target cash balances to $2 billion from $5 billion, resulting in Fitch’s downgrade of Corning’s ratings to ‘BBB+’ from ‘A-‘ on Oct. 29, 2015.
Fitch expects operating performance for Hemlock will remain volatile, given cyclical semiconductor and solar panel demand patterns and excess capacity throughout the supply chain, despite restructuring actions aimed at reducing manufacturing costs. In addition, Hemlock’s settlements of long-term contracts related to lower than expected contractual customer orders will remain uneven, adding to earnings volatility.
KEY RATING DRIVERS
The ratings and Outlook are supported by Fitch’s expectations for:
–Significant liquid crystal display (LCD) glass share leadership and strong market positions in fiber for telecom, and ceramic filters for automotive applications;
–Technology leadership from significant cumulative RD&E investments, resulting in strong operating EBITDA margin in the low- to mid-30s;
–Expectations for annual FCF over the longer term.
Concerns center on Corning’s:
–Potentially limited headroom for operational shortfalls or sustained macroeconomic headwinds, given commitment to more aggressive financial policies;
–Significant ongoing investments in RD&E and capital spending requirements;
–Corning’s need to offset meaningful annual average selling price (ASP) reductions in Display and Specialty Materials with manufacturing efficiencies.
–Organic sales growth is slightly down for 2015 and flat in 2016, on a constant currency basis, followed by low-single-digit growth in 2017-2018.
–Acquisition spending is $250 million to $500 million annually and adds roughly 0.5% of inorganic growth to the top line per year.
–Operating EBITDA margins remain above 30% through the forecast period.
–Capital intensity remains in the mid-teens through the forecast period.
–Shareholder returns are spread evenly through the forecast period and, including the $1.25 billion ASR commencing in the current quarter, exceed $10 billion.
–Debt increases to support shareholder returns beginning in 2016. RATING SENSITIVITIES
Negative rating actions could occur if Fitch expects:
–Total leverage sustained above 2.5x, from structurally lower profitability or debt issuance to pre-fund shareholder returns in conjunction with a significant macroeconomic slowdown; or
–Expectations for annual free cash flow sustained below $500 million.
A return to financial policies consistent with an ‘A’-category rating is unexpected but could result in positive rating action.
Corning’s liquidity as of Sept. 30, 2015 was solid and consisted of:
–$5 billion of cash, cash equivalents and short-term investments, 60% of which was located outside the U.S.;
–Undrawn $2 billion revolving credit facility expiring Sept. 30, 2019. The facility includes a maximum 50% debt-to-total capital covenant (16.7% at Sept. 30, 2015).
Fitch’s expectation for solid annual FCF approaching $500 million also supports liquidity.
As of Sept. 30, 2015, total debt was $5.3 billion (including the unrated $1.15 billion of convertible preferred stock after applying 50% equity credit to $2.3 billion of preferred shares issued to Samsung).
FULL LIST OF RATING ACTIONS
Fitch currently rates Corning as follows:
–Long-term IDR ‘BBB+’;
–Senior unsecured debt rating ‘BBB+’;
–Senior unsecured RCF ‘BBB+’.
–Short-term IDR and CP at ‘F2’.
The Rating Outlook is Stable.
Relevant Committee Date Oct. 29, 2015
Additional information is available on www.fitchratings.com
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Alyssa Castelli, New York, +1 212-908-0540