TEXT-Fitch rates Eastman Chemical proposed note issuance
May 29 - Fitch Ratings has assigned a 'BBB' rating to Eastman Chemical Company's (Eastman) proposed issuance of five, 10 and 30 year notes. The Rating Outlook is Negative. A complete list of ratings is provided at the end of this release. NOTE ISSUANCE The notes will be senior unsecured obligations of Eastman and will rank equally with the company's $1.6 billion of debt as of March 31, 2012. Eastman plans to use the proceeds to fund a portion of the cash consideration of its acquisition of Solutia Inc. (Solutia). The notes are being issued under a new indenture. Key covenants include restrictions on secured debt, restrictions on sale and leaseback transactions, and mergers and asset sales. There are no financial covenants. The notes will have make whole call provisions as well as put option upon a change of control and a downgrade of the notes below investment grade. If the acquisition of Solutia is not completed by Oct. 31, 2012, Eastman will redeem the notes for 101% plus accrued and unpaid interest. SOLUTIA ACQUISITION Under proposed terms of the deal, Eastman will acquire Solutia for approximately $4.7 billion in enterprise value, including the acquisition of Solutia's $1.34 billion in debt outstanding. Closing is anticipated in mid-2012. The Negative Outlook is driven by the debt-heavy financing that will be used to fund the deal. As proposed, Eastman will issue approximately $3.5 billion in acquisition debt (75% of the transaction total), along with equity and excess cash, which will more than triple Eastman's gross debt from $1.6 billion at March 31, 2012 to $5.1 billion. On a pro forma basis immediately following the transaction, debt/EBITDA will increase to approximately 3.0 times (x) versus 1.3x on a stand-alone basis at March 31, 2012, pushing Eastman's credit metrics from levels that were strong for the 'BBB' category to levels that are weak for the category. RATINGS RATIONALE Eastman's stand-alone ratings are supported by the company's portfolio of differentiated chemical products, solid pricing power in key end user markets, good vertical integration of production streams along the acetyl, polyester and olefin value chain, economies of scale at its focused production sites, particularly at its main Kingsport, Tennessee location, and access to low cost light feedstocks in North America, which has improved the company's global cost competitiveness, particularly when compared to heavy-oil-derivative linked chemical production in Europe. Eastman's ratings are also supported by the company's ongoing portfolio high-grading, with shedding of lower margin and commoditized businesses and expansions into higher margin businesses such as filter tow markets in Asia, specialty plasticizers, and Tritan co-polyester. Ratings are balanced by the company's size; cash outflows for expected pension contributions; volatility in raw materials and energy costs; periodically high working capital requirements; an uncertain macroeconomic environment; and the integration risk and higher leverage stemming from the proposed acquisition. RECENT FINANCIAL PERFORMANCE Eastman's recent stand-alone performance has been strong. As calculated by Fitch, latest 12 months (LTM) operating EBITDA at March 31, 2011 rose to $1.2 billion, with EBITDA margins of approximately 16.5%, versus a recessionary low of $791 million in EBITDA and 15.7% margins in 2009. Debt/EBITDA at March 31, 2012 was just 1.3x, while EBITDA/gross interest coverage was a robust 13x. Looking forward, Fitch anticipates the combined company will be significantly free cash flow (FCF) positive in 2012 and 2013. LIQUIDITY Eastman's liquidity remained robust at $1.6 billion at March 31, 2012, consisting of $649 million in cash and marketable securities, full availability on its $750 million in revolver capacity, and full availability on its $200 million accounts receivable securitization facility. Eastman amended its accounts receivable securitization facility in April 2012 to increase its size to $250 million and extend its maturity to three years from one. Eastman's revolver is governed by a debt-to-EBITDA covenant maximum of 3.5x. Fitch expects Eastman to maintain comfortable headroom under the covenant over the remaining lifetime of the facility. Near-term debt maturities are manageable. CATALYSTS FOR RATINGS ACTION Catalysts for removal of the Negative Outlook would include progress in bringing debt/EBITDA metrics back into the 2.0x-2.5x level over the next 12-24 months, while maintaining positive FCF. Catalysts for a downgrade would include failure to make progress de-levering over the next 12-24 months due to a major operational problem; a global downturn which pushed EBITDA lower on a sustained basis; or a change in philosophy on use of the balance sheet. Fitch currently rates Eastman as follows: --Long-term Issuer Default Rating (IDR) at 'BBB'; --Senior unsecured bank credit facility at 'BBB'; --Senior unsecured notes and debentures at 'BBB'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. The Rating Outlook is Negative.