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