TEXT - Fitch rates Methanex Corp proposed notes 'BBB-'
Dec 12 - Fitch Ratings has assigned a 'BBB-' rating to Methanex Corporation's (Methanex) proposed $300 million issuance of 7-year notes. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release. NOTES The proposed senior notes will be unsecured obligations ranked pari passu with the company's existing unsecured notes. Borrowings at subsidiaries such as those used to finance the company's EMethanex and Atlas plants are structurally superior to the notes. Methanex plans to use the proceeds for capital expenditures and other general corporate purposes. The notes are being issued under the company's indenture dated July 20, 1995. Key covenants include restrictions on secured debt, sale and leaseback transactions, certain subsidiaries' ability to incur debt without guaranteeing the proposed notes, and mergers and asset sales. There are no financial covenants. The notes will have make-whole call provisions as well as a put option upon a change of control and a ratings decline. RATINGS RATIONALE Methanex's ratings reflect the company's position as the largest supplier of methanol, its global distribution network, relatively low production costs within the industry, increased geographical diversification, operating leverage to the wide oil-natural gas spread, and conservative financial management. Rating limitations include the company's single-product focus, planned capital expenditures relating to its relocation of Chilean capacity to Geismar, Louisiana, and output constraints facing its remaining Chile plants. Methanex's Chilean plants have been underutilized for a number of years due to the disrupted natural gas imports from Argentina. Methanex has supplemented lost volumes with higher levels of purchased and commissioned methanol sales, but margins on these sales are significantly lower than on Methanex's own production. To address this, the company is in the process of dismantling one plant capable of producing one million tonnes per year, relocating it to Geismar and reassembling it. The company received air rights for the relocated plant on Nov. 13, 2012. Fitch believes it is likely the company will relocate a second Chilean plant in Geismar. While the relocation will save the company substantially in comparison to a greenfield plant, Methanex expects to spend approximately $500 million in relocating one plant and roughly $1 billion relocating both. Methanex's margins in the past two years have benefited from advantageous methanol pricing. Methanol prices have been supported by energy-related uses linked to Brent crude pricing, significant and growing Chinese demand, and rational industry capacity. Fitch anticipates these factors to continue to support methanol prices. Methanex's margins are expected to benefit further when they are able to capture the operating margin from Geismar-produced methanol. Methanex's Geismar facility will be able to benefit from low-priced natural gas which is expected to prevail for the near-to-intermediate term due to the North American shale boom. Natural gas is the feedstock and largest cost item for Methanex's methanol production process. In addition, since issues in Chile first erupted, the company has ramped up production in several other locations including Egypt, New Zealand, and Medicine Hat. On a pro forma basis following the relocation of two plants to Geismar, Fitch anticipates just 21% of the company's nameplate capacity will be in Chile, versus a level as high as 56% in 2009. Methanex solely produces and markets methanol, which has a variety of end uses, from feedstock for formaldehyde and acetic acid in the chemical production chain to energy-related uses in fuel blending. The more traditional uses in the chemical production chain tend to grow with global production while energy-related uses are growing at a faster rate. Methanex produces methanol in Canada, Chile, Egypt, New Zealand and Trinidad and soon, with the Geismar facility, the United States, which diversifies the company's production and reduces risks related to natural gas supply constraints. FINANCIAL METRICS The company's credit statistics have remained stable in 2012 as methanol prices have remained relatively stable year over year. As calculated by Fitch, Methanex's debt/EBITDA decreased from 1.93x in 2011 to 1.89x at Sept. 30, 2012. For the LTM ending Sept. 30, 2012, Fitch-calculated EBITDA/gross interest was 6.84x, and funds from operations interest coverage was 7.24x, versus 7.26x and 7.82x, respectively, in 2011. Free cash flow (FCF) has been strong with $240 million in the LTM period ended Sept. 30, 2012. With significant capital spend relating to its plant relocations and anticipated restarting of New Zealand capacity, Fitch expects FCF to be moderately negative in 2013 and 2014. LIQUIDITY Methanex has a substantial liquidity position totaling $603 million as of Sept. 30, 2012 with $403 million in cash and an undrawn $200 million revolver that expires mid-2015. The company has a light maturity schedule with only amortizations of its limited recourse project financing (2013: $53 million, 2014: $62 million) until its $150 million 6% notes mature on Aug. 15, 2015. Financial covenants contained in the company's revolving credit facility include a debt-to-capitalization ratio of 50% and minimum interest coverage ratio of 2x, both of which the company met comfortably as of Sept. 30, 2012. The company also has a limitation on secured debt included in the revolver and notes outstanding. OTHER CONSIDERATIONS Fitch notes that Methanex's contracts with gas suppliers offer a measure of downside protection for creditors - contracts at several of the company's methanol plants allow Methanex to pay low base natural gas prices but share the upside with natural gas suppliers when methanol prices rise above certain levels. From a creditor perspective, this helps the company by lowering its cost structure under depressed methanol pricing conditions. Supply contracts with this structure include Egypt, Trinidad, and the recently announced New Zealand agreements. WHAT COULD TRIGGER A RATING ACTION Positive: Future developments that could lead to positive rating actions include: --Increased product diversification; --Successful relocation and restart of Chilean plants in Geismar coincident with attractive methanol prices supported by positive demand trends. Negative: Future developments that could lead to negative rating actions include: --Sustained period of methanol overcapacity depressing pricing and margins; --A leveraging transaction moving debt to EBITDA above 3.5x on a sustained basis; --Large share repurchases or special dividends financed by debt. Fitch currently rates Methanex as follows: --Long-term Issuer Default Rating 'BBB-'; --Senior unsecured revolving credit facility 'BBB-'; --Senior unsecured notes 'BBB-'. The Rating Outlook is Stable.
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