CHICAGO - (Business Wire) Fitch Ratings has affirmed the following ratings of Eastman Chemical Company (Eastman): --Long-Term Issuer Default Rating (IDR) at 'BBB';
--Unsecured Credit Facility at 'BBB';
--Senior Unsecured Debt at 'BBB';
--Commercial Paper at 'F2';
--Short-Term IDR at 'F2'.
The Rating Outlook is Stable.
Eastman's ratings incorporate the size, scale and feedstock cost advantages of the company's large vertically integrated facility in Kingsport, Tennessee; Eastman's leading market position in cellulose acetate fibers; its reasonable leverage and credit metrics, solid liquidity position, and ability to adjust its cost structure in the current downturn in order to maintain financial flexibility.
Offsetting considerations center on the impact of the current global economic contraction, which has depressed demand and plant utilization across much of the chemicals sector; the potential financing risk posed by the company's Beaumont gasification project; and acquisition risk.
Eastman recently completed the Front End Engineering and Design (FEED) study for its proposed Beaumont petcoke gasification project and has indicated that the project will be delayed, given the combination of still-high construction costs, weak product demand, and the collapse in the crude oil-natural gas ratio, which is 6.0 times (x) on a btu-equivalent basis and approximately 9.0x on a historical basis, but recently has blown out to over 20x. The decision to postpone the project eases Fitch's credit concerns about near-term pressures on Eastman's free cash flow (FCF). In conjunction with this deferral, Eastman reversed a $12 million investment tax credit (ITC) related to the project in the third quarter. Given this deferral, Fitch believes that capex spending on the project will not begin in earnest until 2011 at the earliest.
Eastman's results have held up well given trough conditions in chemicals. For the LTM period ending Sept. 30, 2009, Eastman's EBITDA was $654 million, while free cash flow was a very robust $420 million, comprised of cash flow from operations of $1.028 billion, capex of $480 million, and common dividends of $128 million. Eastman's cash generation has benefited from several tailwinds, including the release of working capital previously tied up in inventory; the ability to manage lower inventory levels going forward, a one-time tax benefit linked to a changed accounting method, and the margin benefit of sticky downward pricing, as feedstock costs have fallen quicker than Eastman's selling prices. Management has also aggressively pruned its cost structure in order to weather the current down cycle, cutting $200 million in costs over the last 12 months, which should provide ongoing margin benefits. Fitch anticipates the company will be significantly free cash flow positive in 2009, and approximately free cash flow neutral in 2010.
Total debt on Sept. 30, 2009 was $1.44 billion prior to the recent $250 million 2019 issuance and was comprised primarily of unsecured fixed notes and borrowings. Financial covenant restrictions on Eastman's debt outstanding are light and include a maximum consolidated debt to EBITDA ratio of 3.5x (actual 2.2x on Sept. 30, 2009), and change of control provisions (applicable to the revolver and term loan, and recent $250 million issuance only). Other credit metrics are also fairly robust, and include EBITDA/gross interest expense coverage of 6.6x and FFO/interest coverage of 8.5x. Eastman's pension had a funding deficit of $493 million at year end 2008, versus a deficit of $124 million the year prior; however, Fitch anticipates that a meaningful portion of proceeds from the recent bond issuance will be used to reduce this deficit.
Eastman's liquidity was good on Sept. 30, 2009. In addition to $688 million in cash, the company had full availability on its main $700 million revolver (most of which expires in 2013), while both its $200 million accounts receivable securitization facility and 58 million euro term loan were fully drawn (facilities expire in 2010 and 2012, respectively). Note that existing cash and equivalents balances are for the most part not subject to repatriation tax. The next major maturity due is Eastman's 7% 2012 notes.
Eastman Chemical Company is a global chemical producer which manufactures and sells a broad portfolio of chemicals, plastics, and fibers. The company's main operating segments include: CASPI (Coatings, Adhesives, Specialty Polymers, and Inks), Fibers, PCI (Performance Chemicals and Intermediates), Performance Polymers, and Specialty Plastics (SP). The company was spun-off from Eastman Kodak Company in December 1993. Eastman Chemical has approximately 11 manufacturing sites in seven countries and employed 10,500 people as of year end 2008. Company headquarters and the largest manufacturing site are in Kingsport, Tennessee.
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