TEXT-S&P rates Huntsman International debt
Overview -- Salt Lake City-based Huntsman International LLC plans to issue $300 million of senior unsecured notes for refinancing. -- We are assigning a 'BB-' issue rating and '5' recovery rating to these notes. -- We are affirming all our ratings on Huntsman International LLC and its parent company, Huntsman Corp., including the 'BB' corporate credit rating. -- The stable outlook indicates that actions Huntsman is taking to restructure certain operations and continue to gradually reduce debt should permit it to maintain credit quality despite a tepid global economic outlook and headwinds in its titanium dioxide business. Rating Action On Nov. 2, 2012, Standard & Poor's Ratings Services assigned its 'BB-' rating and '5' recovery rating to Huntsman International LLC's proposed offering of $300 million of senior unsecured notes due 2020. The '5' recovery rating indicates our expectation of modest (10%-30%) recovery in the event of a payment default. The company plans to use proceeds from the notes offering to repay an equivalent amount of senior unsecured notes due 2016. Rationale The ratings reflect Salt Lake City-based Huntsman's "satisfactory" business risk profile and "aggressive" financial risk profile. Huntsman is a holding company with diverse chemical operations that generated sales of more than $11 billion in 2011. Business strengths include a broad product portfolio, with increasing emphasis on differentiated products, favorable raw material costs in North America, and a well-established presence in Asia (which accounts for about 25% of sales). Key products and some of their uses include: -- MDI (methylene diphenyl diisocyanate)-based polyurethanes (foam for building insulation, autos, and footwear), its input propylene oxide, and the latter's co-product MTBE (methyl tertiary butyl ether, used as a gasoline additive outside the U.S.); -- Performance products (amines, surfactants, and carbonates used in agrochemicals, cleaning products, and lubricants); -- Pigments (titanium dioxide used in paints and coatings); -- Advanced materials (polymers for coatings, construction, auto, and aerospace); and -- Textile effects (dyes and other chemicals used to treat textiles). The business risk profile assessment also reflects a number of constraining factors, including a significant manufacturing presence in high-cost locations, such as Europe (where restructuring actions are currently underway), exposure to raw material cost swings and cyclical end markets, and comparatively low EBITDA margins in most businesses. Huntsman's financial profile has strengthened considerably during the past two years. Moreover, we believe earnings will continue to improve in most businesses during the next two years based on our expectation of subdued global economic growth; prospects for higher sales of Huntsman's products to auto and construction markets because of increased product penetration and supportive regulations affecting demand for insulation; restructuring benefits; and favorable raw material costs in North America. As a result, we believe the company can sustain 10% to 13% EBITDA margins despite the potential for more subdued results in its titanium dioxide business, which have been cyclically strong and are benefiting from favorable ore contracts expiring at the end of 2012. In addition, we believe Huntsman will continue to incrementally reduce debt. Consequently, we think it can maintain funds from operations (FFO)-to-total adjusted debt above 20% over the long term, although this ratio could dip below 20% during the next year. FFO-to-debt was 22% as of Sept. 30, 2012. We adjust debt to include about $900 million of tax-effected unfunded postretirement liabilities, capitalized operating leases, and environmental liabilities. We base our assumptions, in part, on management's commitment to maintaining net debt to adjusted EBITDA of 2.0x to 2.5x (it was 2.3 x as of Sept. 30, 2012) and focus on continuing to reduce debt to achieve that. The 2.0x to 2.5x net debt-to-EBITDA range is equivalent to about 3.0x to 3.5x total debt-to-EBITDA after Standard & Poor's adjustments. We believe Huntsman's growth strategy will emphasize incremental capacity expansion, joint ventures, and bolt-on acquisitions as opposed to large, debt-financed transactions that could materially weaken leverage metrics. Liquidity Liquidity is "adequate" as defined in our criteria, and we believe Huntsman has sufficient sources of liquidity to cover its needs during the next 12-18 months even if economic conditions deteriorate or performance weakens. As of Sept. 30, 2012, the company had more than $1 billion of liquidity consisting of $435 million of unrestricted cash, $381 million of unused borrowing capacity under its $400 million revolving credit facility maturing in 2017, and $213 million available under two accounts receivable securitization programs that mature in 2014. The maturity of the revolver will accelerate if Huntsman does not repay, refinance, or have a specified minimum level of liquidity to enable it to repay certain debt maturing in 2014 and later. Our assessment of Huntsman's liquidity is based on the following expectations: -- The company's sources of liquidity, including surplus cash and committed credit availability, will exceed its uses by at least 1.2x despite potential volatility in working capital requirements, and it will remain comfortably in compliance with financial covenants in its credit facilities. -- Cash flow generation should be adequate to cover expected capital spending of $425 million to $450 million, as well as a moderate amount of pension and restructuring outlays and incremental debt reduction. -- A refinancing earlier this year lengthened debt maturities, but meaningful amounts remain due in 2014. We expect management to refinance these obligations in a timely manner. Recovery analysis Huntsman's senior secured debt is rated 'BB+' (one notch above the corporate credit rating) with a recovery rating of '2', indicating our expectation for substantial (70%-90%) recovery in the event of a payment default. Its senior unsecured debt is rated 'BB-' (one notch below the corporate credit rating) with a recovery rating of '5', denoting modest (10%-30%) recovery prospects, and its subordinated debt is rated 'B+' (two notches below the corporate credit rating) ,with a recovery rating of '6', reflecting our expectation that recovery would be negligible (0%-10%). For the complete recovery analysis, see our recovery report on Huntsman published May 1, 2012. Outlook The outlook is stable. Huntsman's credit metrics are consistent with our expectations at the ratings, including FFO-to-debt of greater than 20%. Ratios could weaken somewhat during the next year amid a tepid global economy and softer titanium dioxide markets. However, thereafter we expect Huntsman's credit measures to be solidly in line with our ratings expectations, helped by better economic conditions, restructuring benefits, and further modest debt reduction. Nevertheless, we could lower the ratings if earnings deteriorate because of a deeper and prolonged recession in Europe, or substantial economic deterioration in the U.S. or China, or if pigment segment earnings plummet. We could also lower the ratings if the company unexpectedly increases debt for a major acquisition or shareholder rewards. Given Huntsman's current business risk profile, an upgrade would require the financial risk profile to strengthen to a greater degree than we believe management is currently committed to, including FFO-to-debt above 25% on a sustainable basis. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Key Credit Factors: Criteria For Rating Companies In The Global Commodity Chemicals Industry, Sept. 19, 2012 -- Key Credit Factors: Business And Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008 Ratings List Ratings Affirmed Huntsman Corp. Hunstman International LLC Corporate credit rating BB/Stable Huntsman International LLC Senior secured BB+ Recovery rating 2 Senior unsecured BB- Recovery rating 5 Subordinated B+ Recovery rating 6 Ratings Assigned Huntsman International LLC $300M senior unsecured nts BB- Recovery rating 5 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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