Fitch Affirms Westlake Chemical at 'BBB'; Outlook Stable
KEY RATING DRIVERS
The ratings reflect strong earnings and cash flow, steady supply/demand fundamentals for Olefins and Vinyls, combined with a track record of conservative financial policy.
While the oil price drop has cut into margins, Westlake continues to benefit from low feedstock prices, particularly ethane. EBITDA margins remain above 25% (since 2013) compared to approximately 16% in 2011 and prior. As a result of strong margins and selective expansion, earnings and cash flow have been robust and total debt/EBITDA has been under 1x.
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. In addition, the PVC industry can be leveraged to construction, in particular residential construction. Westlake is somewhat insulated given backward integration.
KEY ASSUMPTIONS
--Volumes at capacity
--Prices decline in 2015 and do not improve
--Olefin EBITDA margins average 40%
--Vinyl margins average 20%
--Capital expenditures at 8% of revenues on average
--Dividends grow at 10% per annum
--Distributions at the master limited partnership (MLP) grow at roughly 3% per quarter
--\\$50 million in cash is deemed not readily available to repay debt
--\\$200 million of shares are repurchased annually
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Total debt/EBITDA significantly above 2.0x on a sustained basis
--FFO adjusted leverage of 2.5x or higher on a sustained basis
--Leveraging events: debt financed share repurchases, leveraged acquisitions, etc.
Positive: Not anticipated at this time but future developments that may help lead to a positive rating action include:
--Achieving greater product diversity
--Substantially increased size and scale
LIQUIDITY
At June 30, cash on hand was \\$1 billion (inclusive of \\$132.4 million of cash at non-guarantor subsidiaries) and \\$370 million was available under the company's \\$400 million secured revolving credit facility after \\$29.7 million letters of credit. The facility matures in July 2019 and is subject to a borrowing base comprising receivables, inventory and cash. The credit facility has a covenant stating the company must maintain a minimum fixed charge coverage ratio of 1.0:1.0 for successive 30 day periods after any date on which the borrowing availability under the facility is less than or equal to the greater of (1) 10% of the commitments under the facility and (2) \\$40 million, until the borrowing availability exceeds the greater of the amount in clause (1) and the amount in clause (2) for a 30-business day period.
Westlake has no meaningful maturities until 2022 when its \\$250 million 3.6% notes are due.
In November 2014, the board authorized the company to repurchase up to \\$250 million in shares of its common stock. Share repurchases in the first half of 2015 were \\$62.8 million. The prior \\$100 million program was authorized on Aug. 22, 2011 and substantially exhausted. Since 2010, the company has increased its annual dividends per share by at least 10%. In 2012, the company increased its quarterly dividend by 150% and declared a special dividend aggregating to \\$251 million subsequent to withdrawing its offer to acquire Georgia Gulf.
Fitch expects annual after-tax earnings to be at least \\$500 million and for capital expenditures to drop to depreciation/amortization levels by the end of 2017, which should result in cash flow after capital expenditures and dividends in excess of \\$350 million per annum.
Fitch has affirmed Westlake's ratings as follows:
--Issuer Default Rating (IDR) at 'BBB';
--Senior secured asset based lending facility at 'BBB';
--Senior unsecured notes at 'BBB'.
The Rating Outlook is Stable.
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