OREANDA-NEWS. Fitch Ratings has placed the ratings of the Dow Chemical Company (Dow) on Rating Watch Positive and the ratings of E.I. du Pont de Nemours Company (DuPont) on Rating Watch Negative following the announcement of the proposed merger of equals. The merger is to be a share based transaction expected to close in the second half of 2016 and is subject to regulatory and shareholder approval. Subsequent to the merger, the company is to be split into three separate public companies that are expected to be capitalized as investment grade.

KEY RATING DRIVERS
The merger and subsequent breakup should create market leading, focused businesses benefiting from cost savings and synergies. Fitch believes this will be a prolonged process of reorganizing corporate structures and functions as well as capitalization.

The Rating Watch Positive for Dow reflects uncertainty as to the final capital structure of company that succeeds Dow, as well as its organization, management, and apportionment of liabilities and Fitch's view that a downgrade is unlikely. Fitch expects the succeeding company to have total debt to operating EBITDA sustainably less than 2.5x.

The Rating Watch Negative for DuPont also reflects uncertainty as to the structure of the successor but recognises the risk of downgrade while still structuring the successor to remain investment grade.

Fitch will evaluate the credit quality of each subsidiary based on its assessment of earnings, cash flows and capital structure.

KEY ASSUMPTIONS
--Fitch assumes that Dow and DuPont will not provide cross guarantees and that the new holdco, DowDuPont will not provide a guarantee of Dow or DuPont debt.

--Fitch assumes the Agriculture Company will succeed DuPont, the Materials Science Company will succeed Dow.

--Fitch expects share repurchases and capital transactions to be limited in advance of the merger.

RATING SENSITIVITIES
The Rating Watches are not expected to be resolved prior to definitive information on the break-up or if the merger is terminated. Fitch will evaluate the credit quality of each subsidiary based on its assessment of earnings, cash flows and capital structure.

A positive rating action could occur for Dow or its successor if Fitch expects total debt to operating EBITDA will be sustainably less than 2x.

A negative rating action could occur for DuPont or its successor if total debt to EBITDA is greater than 2 or funds from operations (FFO) adjusted net leverage is greater than 1.5 on a sustained basis.

LIQUIDITY

Dow:

Fitch expects Dow to generate free cash flow (FCF) after capex and dividends, even while capex is elevated. The company's $5 billion revolver maturing March 2020 has been fully available. The revolver has a debt-to-capital covenant maximum of 65%. Scheduled maturities of long-term debt over the next six years are $971 million for 2015, $1.4 billion for 2016, $727 million for 2017, $857 million in 2018, $2.5 billion in 2019 and $2.1 billion in 2020.

DuPont:

The bulk of DuPont's cash flow is generated in the fourth quarter, and Fitch expects Dec. 31, 2015 cash on hand to be roughly $5.1 billion. The company has $4.9 billion of unused credit lines, $4 billion of which is due in May 2019. Fitch expects DuPont to generate at least $650 million of FCF after pension funding requirements, capex and dividends.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings on Rating Watch Positive:

The Dow Chemical Company
--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'.

Fitch has placed the following ratings on Rating Watch Negative:

E. I. DuPont de Nemours and Company
--Issuer Default Rating (IDR) 'A';
--$4 billion unsecured bank revolver 'A';
--Senior unsecured notes 'A';
--Senior unsecured debentures 'A';
--Short-term IDR 'F1';
--Commercial paper 'F1'.