TEXT - Fitch rates NewMarket Corp
Dec 11 - Fitch Ratings has assigned initial ratings to NewMarket Corporation (NewMarket) as follows: --Issuer Default Rating (IDR) 'BBB-'; --Senior unsecured revolving credit facility 'BBB-'. The Rating Outlook is Stable. Approximately $144 million of debt at Sept. 30, 2012 is affected by this rating action. RATING RATIONALE The ratings reflect NewMarket's cash flow generation, position within a consolidated industry with high barriers to entry, and its relatively low leverage. Rating constraints include its smaller size, low industry growth, shareholder friendly activities including share repurchases and special dividends, and past leveraging transactions. NewMarket is a participant in the lubricant additive and fuel additive industries. Companies in this industry require large component blending plants and robust research and development, presenting significant barriers to entry. NewMarket is one of four large competitors in lubricant additives, its largest business line. Lubricant additives enhance lubricants' friction reduction, heat removal, and contaminant containment properties. The largest consumers of lubricants with lubricant additives are automobiles, trucks and heavy industrial equipment. Industry volume growth is determined by fleet size among other factors which tend to grow in line with global industrial activity. NewMarket's EBITDA margins have increased to 17.9% for the latest-twelve-month (LTM) period ended Sept. 30, 2012, up from its 2008 low of 8.9% as the industry has been able to pass through higher raw material prices. Fitch anticipates NewMarket's EBITDA margins will remain in the mid-teens. On Nov. 27, 2012, NewMarket paid a special dividend of $25 per share, totaling $335 million. NewMarket funded this dividend with borrowings under its revolving credit facility. NewMarket has an outstanding authorization for share repurchase of $250 million which expires at the end of 2014. Fitch expects NewMarket to repurchase shares with free cash flow which Fitch defines as cash from operations less capital expenditures and dividends. CREDIT METRICS NewMarket generates FCF (free cash flow) in most years and has produced $173 million in FCF for the LTM period ended Sept. 30, 2012. However, the company will have negative FCF in 2012 due to its $335 million special dividend. The company also will be engaging in higher cap ex in the next couple years to finance the build out of its Singapore facility. Once the Singapore facility is built, capital expenditures are likely to consist primarily of maintenance spending. Despite the heightened cap ex in the next couple years, Fitch expects NewMarket to be FCF positive. NewMarket's leverage is consistent with the rating level. For the LTM period ended Sept. 30, 2012, the company's total debt to EBITDA was 0.4x versus 0.7 for 2011 due to lower debt and higher EBITDA. Pro-forma including the funding of the special dividend, the company's leverage is 1.2x, which is higher than recent reporting periods but within an expected range for the rating category. NewMarket has stayed below 1.5x for a number of years with the exception of 2008. The company had leverage of 1.65x in 2008, which was a period of increased raw materials cost. LIQUIDITY NewMarket has adequate liquidity with $80 million of cash on hand and $507 million of availability under its $650 million revolving credit facility as of Sept. 30, 2012. The facility expires in March 2017. NewMarket repaid its $150 million 7 1/8% notes due 2016 and $63.5 million mortgage loan due 2015 with cash and borrowing under its credit facility in March of this year. The facility includes financial covenants consisting of a leverage ratio of no more than 3x and an interest coverage ratio of no less than 3x. At Sept. 30, 2012, per calculations under the credit agreement, the leverage ratio was 0.41 and the interest coverage ratio was 25.66. The company's material U.S. subsidiaries jointly and severally guarantee the revolving credit facility. While greater than 60% of NewMarket's revenues are generated by non-guarantor subs, most profit is generated by and most assets are held by guarantor subs. WHAT COULD TRIGGER A RATING ACTION Positive: Future developments that could lead to positive rating actions include: --Positive rating actions are not foreseen in the near term since NewMarket is somewhat constrained by its size and limited growth prospects. Negative: Future developments that could lead to negative rating actions include: --Significant industry capacity additions leading to overcapacity which would weigh on operating margins; --Debt-to-EBITDA approaching 2.0x and forecast to remain at that elevated level; --Leveraging shareholder-friendly transactions: additional special dividends, outsize share repurchases, dilutive acquisitions, etc.