OREANDA-NEWS. Fitch Ratings has maintained the Rating Watch Positive on Dow Chemical Company's (NYSE: DOW) ratings and assigned a 'BBB' rating to the Dow Corning Corporation (DCC) term loan. A complete list of rating actions follows this release.

The Positive Watch reflects Fitch's expectation that financial leverage will trend down through the intended merger of Dow and DuPont and the subsequent spin-off of the combined entity into three separate public companies.

Roughly $30 billion in facilities and securities are affected.

The $4.5 billion, 364 day DCC term loan is unsecured and benefits from a DOW guarantee. The facility matures on May 30, 2017 subject to a 364-day extension option at DCC's election, upon the satisfaction of customary conditions precedent and notice periods. In DOW's June 30, 2016 10Q, the company relates that DCC intends to exercise the 364-day extension option.

On June 1, 2016, DOW announced the closing of a transaction with Corning Incorporated whereby DCC became a wholly owned subsidiary of DOW. The term loan was incurred to finance the transaction.

KEY RATING DRIVERS

DOWDUPONT MERGER/SPIN-OFF

Fitch placed DOW's ratings on Rating Watch Positive on Dec. 11, 2015 following the announcement of the proposed merger of equals between DuPont and Dow Chemical Company. The merger is to be a share-based transaction expected to close in the fourth quarter of 2016, subject to regulatory approval. Subsequent to the merger, DowDuPont Inc. is to be partitioned into three separate public companies. SEC filings indicate that DOW will be responsible for its finances, will continue to produce financial statements and that the Material Science business is intended to have a financial profile consistent with DOW. Fitch assumes that the Material Science company will be the successor to DOW.

SCALE AND MARKET POSITION

The ratings reflect DOW's position as the largest North American chemical company, patent-advantaged products representing more than 20% of revenues, and leading market positions in many commodity and specialty chemicals segments. The company has highly integrated production streams resulting in significant economies of scale and scope.

SENSITIVITY TO HYDROCARBONS

Hydrocarbon feedstocks and energy comprise roughly 27% of DOW's production costs and operating expenses. These costs generally follow price trends in oil and increases and decreases in oil prices are generally reflected in selling prices of petroleum chemicals and plastics. Margins have improved, however, on good demand supply fundamentals in end-markets, the company's cost cutting actions, and moves toward greater value-added production.

PLASTICS PROVIDES PROFITS

Over 50% of 2015 operating EBITDA was attributed to the Performance Plastics segment. DOW is the largest ethylene and second largest polyethylene producer in the world. 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 profits given investments in the U. S. Gulf Coast and at the company's 35% owned Sadara Chemical Company.

SIGNIFICANT CAPITAL SPENDING COMMITMENTS

DOW is expanding its U. S. Gulf Coast ethylene and propylene capacity in order to take advantage of low feedstock costs. These expansions have increased annual capital expenditures above $3.5 billion, but this is expected to trend to depreciation expense levels once the projects complete, expected in 2017. Fitch views the economics of these projects favorably given the domestic and export markets for DOW's downstream products and competitive advantages from low feedstock costs.

PREFERRED SHARES

DOW's preferred stock Series A has dividends aggregating $340 million annually compared to the common stock equivalent dividend of less than $200 million annually. DOW may convert the issue into common stock at the applicable conversion rate if the common stock price exceeds $53.72/shr. for any 20 trading days in a consecutive 30 day window. The $4 billion DOW cumulative convertible preferred shares (if not converted to Dow common stock prior to the merger) are to be converted to a like issue of DowDuPont preferred shares. Fitch assumes that DOW's dividend policy will remain the same during the transition.

STRUCTURAL CONSIDERATIONS

DOW's senior unsecured notes do not benefit from upstream guarantees and are structurally subordinated to about $6.3 billion of subsidiary indebtedness.

Union Carbide is a wholly-owned subsidiary of DOW 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 continuing exposure to asbestos litigation. Union Carbide has $472 million of notes outstanding.

The rating of the Rohm and Haas notes and debentures is based on the unconditional and irrevocable guarantee from DOW. Rohm and Haas has $1.2 billion in notes and debentures, of which, the 7.86% senior note due 2029 in the amount of $773.9 million is not guaranteed by DOW and not rated by Fitch.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for DOW include:

--Fitch assumes that DOW and DuPont will not provide cross guarantees, there will be no borrowing at the DowDuPont level, and that DowDuPont will not provide a guarantee of Dow or DuPont debt;

--Fitch assumes the Material Science Company will succeed DOW and have a credit profile generally consistent with of DOW as of Dec. 11, 2015;

--$1.6 billion in cash is assumed to be not readily available to repay debt;

--2016 revenue headwinds as exhibited in the first half of 2016, slow growth thereafter;

--EBITDA margins at roughly 20%;

--Capital expenditures at guidance to trend to depreciation expense levels beginning in the second half of 2017;

--Share buybacks to be less than $2 billion before the merger;

--Aggregate dividends to DowDuPont to be consistent with current levels adjusted for reduced share count;

--Additional borrowings are not expected over the ratings horizon.

RATING SENSITIVITIES

The Ratings Watch will be resolved when Fitch has further clarity on the operating profile and capital structure of the successor to Dow.

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 generates annual FCF over $1.5 billion;

--FFO adjusted net leverage trending toward 1.5x on a sustained basis.

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;

--FFO adjusted net leverage greater than 2.5x on a sustained basis.

LIQUIDITY AND LEVERAGE

STRONG LIQUIDITY

As of June 30, 2016, cash on hand was $7.3 billion including $4.7 billion held at subsidiaries in foreign countries. The company's $5 billion revolver maturing March 2020 was fully available and a further $1.3 billion of short-term committed facilities are available. The revolver has a debt to capital covenant maximum of 65% which compares to the calculation of 40% at June 30, 2016. The covenant applies at any time when outstanding balances are equal to or greater than $500 million. Total liquidity of $11.7 billion compares to Fitch's expectation that Dow will generate free cash flow after 2016 capital expenditures guided to $3.9 billion, annual interest expense estimated at $1 billion, and annual dividends estimated at $2.5 billion. Current maturities of debt over the next five years are $373 million for 2016, $655 million for 2017, $5.3 billion for 2018, $2.4 billion in 2019, $1.8 billion in 2020.

DE-LEVERAGING EXPECTED

As of June 30, 2016, total debt at $25.7 billion compared at 3.1x LTM operating EBITDA of $8.4 billion and FFO adjusted net leverage was 2.9x following the acquisition of the remaining 50% of Dow Corning using $4.5 billion of additional debt on June 1, 2016. DOW has been rationalizing its portfolio of businesses to drive higher margins and cash flow as well as provide returns to shareholders. Fitch expects debt levels to remain at about current levels absent recapitalizing events. Fitch expects FFO adjusted net leverage to decline to below 2x over the rating horizon.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following rating on Rating Watch Positive:

Dow Corning Corporation

--Senior unsecured term loan 'BBB'.

Fitch has maintained the Rating Watch Positive on DOW's ratings as follows:

The Dow Chemical Company (DCC)

--Long-term IDR 'BBB';

--Senior unsecured revolving credit facility 'BBB';

--Senior unsecured debt 'BBB';

--Short-term IDR 'F2';

--CP ratings 'F2'.

Dow Capital BV

--Senior unsecured debt 'BBB'.

Union Carbide Corporation (Union Carbide)

--Long-term IDR 'BBB-';

--Senior unsecured debt 'BBB-'.

Rohm and Haas Company (Rohm and Haas)

--Senior unsecured debentures and notes guaranteed by Dow Chemical 'BBB'.