TEXT-S&P rates Celanese U.S. Holdings notes 'BB'
Overview -- U.S. based chemical producer Celanese US Holdings LLC is issuing $500 million in senior unsecured notes due 2022. -- We assigned a 'BB' issue rating and '4' recovery rating to Celanese's proposed $500 million notes due 2022. -- We raised the issue rating on the existing senior unsecured notes to 'BB' from 'BB-' and revised the recovery rating to '4' from '5'. -- At the same time, we affirmed the 'BB' corporate credit and senior secured debt ratings on the company. -- The positive outlook reflects our opinion that, if operating performance remains strong and management continues to pursue a disciplined financial policy, we could raise the ratings modestly. Rating Action On Nov. 7, 2012, Standard & Poor's Ratings Services assigned its 'BB' issue rating and '4' recovery rating to Celanese's proposed $500 million notes due 2022. We also affirmed the 'BB' corporate credit rating on the company, as well as the 'BBB-' rating on the senior secured notes. We are maintaining our '1' recovery rating for the senior secured debt obligations, indicating our expectation of a very high (90% to 100%) recovery in the event of payment default. Also, we raised our rating on the senior unsecured notes to 'BB' and revised our recovery rating for both tranches of the unsecured notes to '4' from '5', indicating our expectation of an average (30% to 50%) recovery in the event of payment default. The company will use proceeds from the notes issuance to repay a portion of the outstanding term loans under the company's senior credit facilities, and to make a $100 million contribution to Celanese's U.S. pension plan. Rationale The ratings on Celanese US Holdings LLC, a subsidiary of Celanese Corp., reflect our assessment of the company's business risk profile as "satisfactory" and a financial risk profile we view as "significant". The company is a leading global producer of diverse commodity and manufacturing chemicals in a cyclical and highly competitive industry. However, the relative stability of operating profits reflects the strength of Celanese's competitive positions. Solid internal funds generation enhances the company's flexibility to make bolt-on acquisitions and capital investments to achieve growth. With annual revenues of about $6.5 billion, Celanese ranks as No. 1 or 2 by global sales for many of its products. It has broad product diversity, balanced end-market positions, and an earnings base distributed across North America, Europe, and Asia. Still, its results remain subject to general economic activity, as well as the cyclicality of certain industries it serves, particularly automotive, electrical, and construction. Celanese also generates a significant portion of its consolidated earnings from its acetyls intermediates business, which consists primarily of products with commodity-like characteristics. However, the company's market share and expansion into downstream products lessens cyclicality compared with producers of other commodity chemicals with more fragmented competition. Volume declines due to weak macroeconomic conditions in Europe and decelerating growth in China drove lower operating results in the first nine months of 2012, compared with the corresponding period in 2011. Consolidated EBITDA margins have declined to 14% from 16% a year ago, and the company has taken restructuring actions--including idling or closing certain production facilities and reducing its overall fixed-cost structure. Celanese's acetyls intermediates unit is the No. 1 global producer of acetic acid and vinyl acetate monomer (VAM). The top two players in the acetic acid industry have more than 50% of the market, and demand growth is generally GDP plus 1% to 2%. The VAM product category is similarly attractive--the top four players control more than 50% of the market, and demand growth is slightly above GDP. Celanese's technology provides it with a good cost advantage (creating a barrier to competitive entry). Further advancing this competitive advantage is the company's investment in its state-of-the-art facility in Nanjing, China, which began operating in 2007, expanding its already extensive presence in the higher-growth Asia region. Celanese also has a leading position in the production of acetate tow for cigarette filter applications--a steadily profitable business that has become a source of dividends from its ventures in China. The high-operating-margin advanced engineered materials segment supplies technical polymers (niche specialty plastics) used in a wide range of applications in the automotive and electronic sectors, as well as other consumer and industrial goods. Despite lower year over year earnings, credit measures remain above par with FFO-to-total debt at about 26% as of Sept. 30, 2012, which remains above the FFO-to-total debt ratio of 20% we view as appropriate for the ratings. Our debt calculations capitalize operating leases and include unfunded pension and postretirement benefit obligations. The excess cash on Celanese's balance sheet should provide cushion for acquisitions and growth-related investments. In June 2012 Celanese announced plans to construct and operate a 1.3 million ton per year methanol production facility at its Clear Lake, Texas acetyl complex, which it expects to start up in 2015. This would further integrate Celanese's production and take advantage of low cost U.S. natural gas supplies. The company is evaluating strategic alternatives to share the off-take and minimize its capital expenditures at the planned facility. As part of its longer-term strategy, Celanese is working on several projects to utilize its technology to produce industrial ethanol and fuel for transportation. In March 2012, Celanese received key government approvals necessary to proceed with its previously announced plans to modify and enhance its existing integrated acetyl facility in China to produce ethanol for industrial uses. The company expects the unit, based on the Celanese TCX(r) ethanol process technology, to begin production in mid-2013. Celanese also plans to construct one or possibly two greenfield ethanol units in China to produce ethanol for industrial uses, and expects its initial investment to be $300 million per unit (to be spread over three years) with capacity of 400,000 tons per year per unit. The company entered into an agreement to advance the development of fuel ethanol projects with Pertamina, the state-owned energy company of Indonesia. Pertamina will collaborate exclusively with the company to jointly develop synthetic fuel ethanol projects in the Republic of Indonesia utilizing Celanese's proprietary TCX(r) ethanol process technology. Liquidity We deem the company's liquidity to be "strong" based on its ample liquidity via its substantial cash balances, solid free cash generation, and availability under its revolving credit facility. As of Sept. 30, 2012, Celanese had $928 million in cash, full availability under its $600 million revolving credit facility due 2015, and $158 million in availability under the $228 million credit-linked revolving credit facility. Proforma for the refinancing, we expect cash balances to remain above $900 million. Other relevant aspects of our assessment of the company's liquidity profile include: -- We believe that sources of liquidity over the next year will exceed its uses by 1.5x or more; -- Net sources and covenant cushions should be positive even with a 30% drop in EBITDA or a 25% increase in debt; and -- The company benefits from strong access to capital markets, and it could likely absorb low-probability shocks, based on positive cash flows from operations and available liquidity. We expect capital expenditures to be about $350 million in 2012, and capital spending on its ethanol capacity will be spread out over the next several years. We believe Celanese likely will use its free cash for bolt-on acquisitions, organic growth and expansion opportunities, debt reduction, and limited share repurchases. In October 2012, the Board of Directors approved an increase to the company's share repurchase authorization to $400 million. Debt maturities are manageable, with limited maturities until 2015 when the revolving credit facility expires. The first-lien senior secured facility covenant requires the company's first-lien senior secured leverage ratio to be less than 3.9x when any amount is outstanding under the revolving credit facility. We expect the company to maintain reasonable cushion with respect to covenant compliance under the credit agreement. Celanese will likely contribute about $100 million to $125 million (in excess of the pension expense) to its defined benefit pension plans in 2012. Its unfunded pension obligations are significant at $1.2 billion as of Dec. 31, 2011. The company's other postretirement benefit obligations were unfunded at $281 million as of year-end 2011. Recovery analysis For the detailed recovery analysis, see our recovery report on Celanese, to be published soon on RatingsDirect. Outlook The positive outlook reflects the company's above-par credit metrics, and our expectation of continued earnings growth over the next couple of years. Given its ongoing product innovation, geographic diversity, and efforts to boost productivity, we believe that Celanese can maintain its strong internal cash generation. We do not expect the company to make significant share repurchases or large acquisitions. We could raise the long-term ratings by one notch during the next several quarters if earnings and cash flow continue to increase, so that Celanese can preserve an FFO-to-total debt of 25% to 30% on a sustained basis. This could happen if the firm maintains debt near current levels while achieving annual top-line growth of 5% to 10% and EBITDA margins improving by 100 to 200 basis points from current levels. On the other hand, we could revise the outlook to stable if FFO-to-total debt declines to less than 20% as a result of weaker end-market demand, greater-than-expected shareholder-friendly activity, or any large debt-financed acquisitions. Related Criteria And Research -- 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 Celanese US Holdings LLC CNA Holdings Inc. BB/Positive/-- Senior secured BBB- Recovery rating 1 Rating Raised Celanese US Holdings LLC To From Senior unsecured BB BB- Recovery rating 4 5 Rating Assigned Celanese US Holdings LLC $500 mil. snr unsec nts due 2022 BB Recovery rating 4 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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