TEXT-Fitch rates DuPont's proposed notes 'A'
Feb 12 - Fitch Ratings has assigned an 'A' rating to E. I. du Pont de Nemours and Company's (DuPont) proposed $2 billion note issuance with tenors of 10 and 30 years. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release. NOTES The notes will be senior unsecured obligations of DuPont and will rank equally with the company's $11.7 billion of debt as of Dec. 31, 2012. DuPont plans to use the proceeds for general corporate purposes, including the repayment and refinancing of debt. The notes are being issued under the company's indenture dated June 1, 1992. Key covenants include restrictions on secured debt, restrictions on sale and leaseback transactions, 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 downgrade of the notes below investment grade. KEY RATING DRIVERS The ratings reflect DuPont's strong business profile, solid liquidity, and substantial free cash flow generation. DuPont benefits from end-market diversification and global reach (particularly into emerging markets), integrated operations and leading market positions and brands across multiple segments. The company's product portfolio is primarily R&D-based and often patent protected, enabling sustainable market advantages and high operating margins. CREDIT METRICS DuPont's credit metrics are in line with Fitch's expectations. The company generated $1.5 billion in free cash flow in 2012, meeting Fitch's expectation of greater than $1 billion. DuPont's total debt-to-operating EBITDA was 2.1 times (x), greater than Fitch's expectation of below 2.0x. However, DuPont Performance Coatings (DPC) was reclassified as a discontinued operation, and including EBITDA from that business, total debt-to-adjusted EBITDA would be below 2.0x. Net debt to operating EBITDA at Dec. 31, 2012 was 1.3x, meeting Fitch's expectation of below 1.5x. This issuance along with the divestiture of DPC will keep DuPont's gross leverage above 2.0x in the near term. However, net leverage is expected to remain well below 1.5x and free cash flow will is forecast to be greater than $1 billion. Further, DuPont has initiated a cost cutting plan that it expects will achieve pre-tax cost savings of approximately $300 million in 2013 increasing to $450 million per year in subsequent years. The savings from the plan will offset a large portion of the operating income of DPC. Through growth and repaying maturities with cash, Fitch expects DuPont's gross leverage to be below 2.0x by mid-2014. LIQUIDITY Liquidity should remain strong with expected free cash flow generation after capital expenditures and dividends of at least $1 billion in 2013, $4.4 billion in cash on hand and marketable securities and $4.3 billion in available credit at Dec. 31, 2012. The company's $3.5 billion revolver is due in February 2015 and contains a debt-to-capital covenant with a maximum of 67%. DuPont has significant headroom under the covenant which it is expected to maintain. Near-term maturities are manageable with $1.3 billion due in 2013, $1.7 billion due in 2014, $1.5 billion due in 2015, and $1.6 billion due in 2016. PENSION FUNDING A rating concern is the underfunding of the pension funds. The U.S. pension plans with plan assets were underfunded by $6.6 billion at Dec. 31, 2012. The company does not expect to make contributions for 2013 after making contributions of roughly $500 million in 2010 and early 2012. However, Fitch recognizes DuPont may make significant cash contributions to the pension plan in the future given the substantial underfunded position of the company's pension plans. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: --Total debt to EBITDA below1.5x on a midcycle basis in combination with annual FCF over $1.5 billion. Negative: Future developments that could lead to negative rating actions include: --Leveraging transactions: debt financed share repurchases, dilutive acquisitions, etc.; --Diminished cash balances while gross leverage remains above 2.0x; --Weak or negative FCF leading to incremental borrowings. FULL RATINGS LIST Fitch rates DuPont as follows: --Issuer Default Rating (IDR) 'A'; --$3.5 billion unsecured bank revolver 'A'; --Senior unsecured notes 'A'; --Senior unsecured debentures 'A'; --Short term IDR 'F1'; --Commercial Paper 'F1'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Rating Chemical Companies' (Aug. 9, 2012); --'2013 Outlook: North American Chemicals Industry' (Jan. 28, 2013). Applicable Criteria and Related Research: Corporate Rating Methodology Rating Chemical Companies 2013 North American Chemical Outlook