TEXT-S&P rates Westlake Chemical unsecured notes 'BBB-'

Tue Jul 10, 2012 12:17pm EDT

July 10 - Overview
     -- U.S.-based Westlake Chemical Corp. is issuing $250 million in 
unsecured notes and will use the proceeds to pay down existing notes maturing 
2016.
     -- We are assigning our 'BBB-' rating to the new issue. 
     -- Our existing ratings on Westlake Chemical Corp., including the 'BBB-' 
corporate credit rating, remain unchanged.
     -- The stable outlook indicates our expectation that credit measures will 
remain appropriate for the ratings despite a meaningful capital investment 
program and our expectation for cyclicality.

Rating Action
On July 10, 2012, Standard & Poor's Ratings Services assigned its 'BBB-' issue 
rating to the company's proposed $250 million unsecured notes issue due 2022. 
We expect the company to use proceeds from the issue to pay down $250 million 
in unsecured notes maturing 2016. Our ratings on Westlake, including the 
'BBB-' corporate credit rating, remain unchanged. The outlook is stable.

Rationale
Our ratings on Houston-based Westlake Chemical Corp. reflect the company's 
"fair" business risk profile, which includes its domestically focused 
commodity olefins and chlorovinyl businesses with cyclical end markets; 
vulnerability to input cost increases; and an "intermediate" financial risk 
profile. 

Westlake's business strengths include a fair degree of manufacturing 
integration in its businesses and a favorable domestic market share in a key 
product, low-density polyethylene (LDPE). Westlake benefits from its in-house 
production of ethylene, a key input into both businesses. In polyvinyl 
chloride (PVC), Westlake also benefits from its backward integration into 
chlor-alkali and from its market positions in fabricated products such as 
pipe, profiles, and fencing products. We expect the company's proposed 
chlor-alkali project will increase the level of backward integration in the 
PVC business. The company expects its chlor-alkali expansion and ethylene 
debottlenecking projects to result in self-sufficiency in major input 
materials and lead to margin improvements by replacing higher-cost external 
raw material purchases. 

We expect Westlake's focus on LDPE markets in the U.S. to help sustain 
operating results at reasonable levels, particularly during the current period 
of supply additions in other grades of polyethylene. The company's LDPE, 
produced using an autoclave process, caters to somewhat higher-value niches 
than commodity plastics typically do. Another strength is the potential for 
divergence of cycles between Westlake's two main businesses, which provides 
some diversity and could reduce the company's exposure to industry downturns. 
The company's EBITDA has improved since the severe recession in 2008, 
benefitting from improving demand, cost restructuring, and, more recently, 
favorable natural gas pricing. EBITDA margins, currently about 16%, had 
declined to less than 10% in 2008. Our base case expectation is for 2012 
EBITDA to strengthen slightly from 2011 levels of about $600 million. Key 
elements of our forecast include:

     -- We expect ongoing benefits from low U.S. natural gas costs.
     -- Gradually improving demand reflects a steady improvement in economic 
growth in 2012 and 2013.
     -- Beyond 2012, we expect the company to benefit from increased ethylene 
capacity, which should increase integration further at a relatively low 
capital cost (compared with greenfield capacity), and increased chlor-alkali 
capacity.

Westlake, with nearly $3.8 billion in sales for the 12 months ended March 31, 
2012, is a midsize producer of commodity petrochemical products in two broad 
chemical categories: olefin/polyolefins and vinyls. 

We expect cash balances and cash flow generation will be adequate to fund the 
company's existing capital plans and do not expect debt to increase 
meaningfully. We expect Westlake to maintain the key ratio of funds from 
operations (FFO) to total adjusted debt above 35%, which we view as 
appropriate for the rating. The ratio was at approximately 50% as of March 31, 
2012. We believe the strength in credit metrics offers some cushion against 
volatility in earnings and cash flow at Westlake's commodity vinyls and 
olefin/polyolefin businesses and midsize strategic acquisitions like the $235 
million purchase of Eastman Chemical Co.'s (BBB/Stable/A-2) polyethylene and 
epolene polymers business in 2006. An important component of the ratings is 
our view of management's commitment to maintaining credit quality. Our ratings 
do not factor in large debt-funded acquisitions, which have the potential to 
weaken credit metrics to levels below our expectations. 

Liquidity
Liquidity is "strong." We expect sources of funds to exceed uses by at least 
1.5x over the next year. If the springing covenant becomes applicable, net 
sources and covenant cushions would be positive even with a 30% drop in EBITDA 
or a 25% increase in debt. 

Unrestricted cash balances, as of March 31, 2012, were $895 million, in 
addition to about $66 million in restricted cash. There were no borrowings 
under the company's $400 million asset-based revolving credit facility and 
availability was about $384 million after accounting for letters of credit. 
The facility matures in September 2016. The restricted cash is related to the 
unused portion of tax-exempt revenue bonds the company issued in 2007, 2009, 
and 2010. 

We expect existing cash balances and free cash generation to be sufficient to 
fund significant capital spending over the next three years. We view a major 
portion of future capital outlays as discretionary, with some flexibility in 
terms of timing of outlays. 

We expect that the company will be in compliance with a springing financial 
covenant if that covenant becomes applicable. The availability-based covenant 
has not been applicable in the past year, and cushions under the covenant have 
been very comfortable. The debt maturity profile is favorable. The revolving 
credit facility maturing in 2016 is the nearest meaningful maturity.

Westlake typically pays out modest amounts of dividends ($18 million in 2011 
and $16 million in 2010), and we assume that future payouts will remain at 
these levels. In 2011, it announced a $100 million share buyback. As of March 
31, 2012, the company had bought back about $2.5 million in shares. The 
share-buyback plan is unusual for the company, and we expect Westlake to limit 
its repurchase to $100 million.


Outlook
The stable outlook reflects our expectation that credit metrics will remain 
appropriate for the rating, including the key ratio of FFO to total adjusted 
debt at 35% or higher. We anticipate that the financial profile--including 
financial policies--will support the ratings and at least partly offset some 
of the business profile risk in Westlake's commodity chemical businesses. Our 
ratings assume that management will undertake necessary steps to preserve 
credit quality, including a prudent approach to its investments and capital 
spending program, and that the company's strong liquidity will provide a 
buffer against unexpected periods of operating weakness. 

We could lower the ratings if leverage ratios weaken, including if FFO to 
total debt (net of restricted cash) declines toward 25% without near-term 
prospects of reverting to levels consistent with our expectations. This could 
happen if operating margins declined to single digits and growth turned 
negative. We could also lower the ratings if liquidity weakens meaningfully. 
We consider an upgrade unlikely as the company's business risk profile and the 
potential for higher capital spending to support growth constrain the ratings.

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27,2009

Ratings List
Westlake Chemical Corp.
 Corporate Credit Rating                BBB-/Stable/--

New Rating
Westlake Chemical Corp.
 $250 mil. unsecured notes due 2022     BBB-               

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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