OREANDA-NEWS. 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.

The Stable Outlook reflects Fitch's expectation that total debt/EBITDA will be at or below 2.5x by the end of 2018, reflecting Eastman's earnings growth expectations and its debt repayment efforts.

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 that translate to strong free cash flow (FCF) generation. Eastman's ratings are also supported by the company's ongoing portfolio high-grading, with shedding of lower margin, commoditized businesses and expansions into higher margin, higher growth businesses. Offsetting factors include the company's exposure to volatility in raw materials and energy costs, specifically olefins and methanol, global macroeconomic environment headwinds, and a continued period of heightened leverage stemming from the company's 2014 acquisitions.

INCREASING SPECIALTY, REDUCED COMMODITY EXPOSURE EXPECTED

Fitch expects Eastman to continue to improve its portfolio mix as higher-margin products expand and the company sheds much of its exposure to its commoditized portfolio. Over two-thirds of 2016 operating profit was attributed to the Additives and Functional Products and Advanced Materials segments, both of which have EBITDA margins of over 20%. Fitch expects faster growth in higher margin product lines like its Crystex, Tritan, and Aerafin product lines to increase overall margins over time as well, as the company expands to other high-growth applications in healthcare, personal care, and automotive production. The Taminco business lines have further diversified Eastman's customer base into attractive bio-centric markets while leveraging Eastman's technology and feedstock advantages.

The company's commodity olefin price exposure should also drop within the next few years, as the company looks to divest its excess merchant ethylene production and start receiving additional contracted propylene from Enterpise Products Partners L. P.'s new plant, now slated to come online in the first half of 2017. These actions would increase vertical integrations of the company's specialty product lines and reduce earnings volatility going forward.

ELEVATED LEVERAGE, ROBUST FCF EXPECTATIONS

Eastman is on its debt repayment track it laid out post-acquisition of Taminco, already repaying roughly $700 million of its $1 billion planned repayment by the end of 2016. Fitch expects the company to continue to repay $300 million-$500 million in debt annually in the coming years, primarily through FCF generation, in order to decrease leverage to 2.5x by the end of 2018. Fitch projects leverage to be approximately 3.2x total debt/EBITDA at the end of 2016. Fitch expects the company will generate FCF after capital expenditures and dividends of $600 million-$650 million in 2016 and will likely generate over $600 million in FCF annually in our base case.

LIQUIDITY

Liquidity is provided by an undrawn $1.25 billion unsecured credit facility (due October 2020). The credit facility backstops Eastman's commercial paper program, and there was $1 billion available due to $222 million of commercial paper outstanding as of June 30, 2016. Total liquidity is $1.3 billion including $240 million of cash on the balance sheet and $50 million of availability on the company's $250 million A/R facility. Near to intermediate term maturities include $500 million due June 2017, $165 million due November 2018, and the $250 million term loan due 2019.

KEY ASSUMPTIONS

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

--Revenue of $8.7 billion in 2016, increasing to over $9 billion by the end of 2018;

--2016 capex at higher end of guidance of $600 million-$625 million;

--EBITDA margin at 24% in 2016, increasing to over 25% as cost savings and synergies from acquired businesses flow through, and hedges that currently have a net negative impact on earnings expire;

--Repayment of an additional $300 million of debt by end of 2016 ($1 billion total in 2015-2016), with repayments at approximately the rate of the company's maturity schedule going forward;

--Dividends and pension contributions within company guidance.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

--Total debt to EBITDA of less than 1.5x on sustained basis in combination expectations of annual FCF over $1 billion.

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 Issuer Default Rating (IDR) at 'BBB';

--Senior unsecured revolving credit facility at 'BBB';

--Senior unsecured notes/debentures/term loan at 'BBB';

--Short-Term IDR at'F2';

--Commercial Paper at 'F2'.

The Rating Outlook is Stable.