NEW YORK--Fitch Ratings has assigned a 'BBB' rating to Westlake Chemical Corporation's (Westlake; NYSE: WLK) $624.8 million issuance of senior notes due 2021 and $433.8 million issuance of senior notes due 2023. The Rating Outlook is Stable. The notes were issued in connection with the exchange offer for the Axiall Corporation senior notes. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
ALL-CASH OFFER FOR AXIALL
On August 31, Westlake completed the acquisition of 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 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, which restarted recently. The company announced a project to increase annual ethylene capacity by about 100 million pounds at its Calvert City facility with completion targeted 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.
--$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 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; and
--$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. Fitch estimates total pro forma liquidity at roughly $1.3 billion, which includes a $1 billion unsecured revolving credit facility due 2020 and cash on hand. The revolving credit facility includes a net debt/EBITDA covenant of 3.5x until December 2017, and 3.0x thereafter.
Westlake has no meaningful maturities until 2021 when its new $625 million 4.63% notes are due.
Fitch currently rates Westlake as follows:
--Long-Term Issuer Default Rating (IDR) 'BBB';
--Senior unsecured revolving credit facility 'BBB';
--Senior unsecured notes 'BBB'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: August 2, 2016
SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS
Fitch has made no material adjustments that are not disclosed within the company's public filings.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)