July 9, 2012 / 4:32 PM / 5 years ago

TEXT-S&P affirms Cabot Corp 'BBB+' rating

Overview
     -- U.S.-based chemical company Cabot Corp. plans to raise $600
million in unsecured notes to partly fund its $1.1 billion acquisition of Norit
N.V., the parent company of Norit Holding B.V. 
     -- We are assigning our 'BBB+' issue rating to the company's proposed 
notes, affirming our ratings on Cabot Corp., including the 'BBB+' corporate 
credit rating, and removing all ratings from CreditWatch with negative 
implications.  
     -- Our ratings on Norit Holding B.V., including the 'B+' corporate credit 
rating, remain on CreditWatch with positive implications pending the close of 
the acquisition.
     -- The negative outlook on Cabot reflects the risk that an unexpected 
slowdown in operating performance and integration-related challenges could 
constrain expected improvement to the company's leverage-related credit 
metrics.

Rating Action
On July 9, 2012, Standard & Poor's Ratings Services affirmed its ratings on 
Cabot Corp., including its 'BBB+' corporate credit rating. The outlook is 
negative. We are removing the ratings from CreditWatch, where we placed them 
with negative implications on June 21, 2012, following Cabot's announcement of 
its plans to acquire Norit N.V., the parent company of Norit Holding B.V. 
(B+/Watch Pos/--) for $1.1 billion. At the same time, we are assigning our 
'BBB+' issue ratings to the company's proposed $600 million in unsecured 
notes, consisting of two series of notes of $300 million each. The company 
plans to use the notes, along with $250 million in drawings under a revolving 
credit facility and $250 million of cash, to fund the acquisition. We expect 
the acquisition to close in fiscal-year 2012, ending Sept. 30.

Our ratings on Norit Holding B.V., including the 'B+' corporate credit rating, 
remain on CreditWatch with positive implications.

Rationale
The ratings on Cabot reflect the company's "satisfactory" business risk 
profile and "intermediate" financial risk profile as a leading global player 
in a largely commodity product category. Our view is that the acquisition 
strengthens aspects of the business risk profile, albeit only modestly so that 
the overall business risk profile remains satisfactory. We also believe that 
the largely debt-funded acquisition ($850 million in debt and $250 million in 
cash on the balance sheet) weakens the financial risk profile somewhat, but we 
assume that improvements to operating performance and management's commitment 
to maintaining credit quality at the current rating will drive improvements to 
leverage-related credit metrics so that they strengthen to levels appropriate 
for the ratings in the next 12 to 24 months.

Cabot is a global leader in the carbon black segment with considerable 
geographic diversity--about 80% of sales are from outside the U.S. It is the 
most geographically diversified major carbon black producer and is 
well-positioned to benefit from a global increase in carbon black consumption. 
To benefit from rapidly growing emerging markets, Cabot announced in 2011 that 
it will invest to expand capacity in China, Indonesia, and South America 
through 2013. The company also invests in research to boost new product 
development as a means of increasing the proportion of higher-value-added 
applications in its products. Given the unrelated nature of Norit's products 
and markets, we do not expect the acquisition to provide any meaningful 
benefits to the company's cost or market position in its existing commodity 
businesses. However, we do expect the acquisition to accelerate its strategic 
objectives, especially those related to increasing the proportion of 
value-added products in the overall business mix and providing a measure of 
diversity in revenue and earnings streams. The company's EBITDA margins have 
been 13% to 16% in the recent past, except during the economic downturn in 
2008 and 2009 when margins declined sharply. We expect that Cabot's operating 
margins will benefit from the addition of Norit, which has a track record of 
attractive profitability. 

We also expect the acquisition to lend greater stability to Cabot's margins, 
though potential volatility in margins remains a risk. Still, Norit's 
higher-margin business will only be a small portion of the combined company 
given Norit's relatively small revenue base of slightly above 10% of combined 
pro forma revenues for 2011. Our base case scenario assumes that Cabot's 
EBITDA in 2012 will be an improvement over 2011 based on the following 
observations and assumptions: 
     -- First-half 2012 adjusted EBITDA is approximately $250 million, which 
puts the company on a path to exceed the $430 million it achieved in fiscal 
2011 (excluding earnings from the recently divested "supermetals" business in 
both years).
     -- We expect the pricing improvements that have contributed to better 
margins to continue.
     -- The company is likely to benefit from new capacity in fast growing 
regions including China, which we expect to offset slowdowns in markets such 
as Europe from a weak economy.

Despite the strength of its market positions, the business risk assessment 
considers several limiting factors such as Cabot's narrow product focus, 
dependence on the automobile sector, and exposure to volatility in its key 
hydrocarbon based raw material. Carbon black sales, through its rubber black 
and performance products segments, constitute a major portion of revenue for 
the company, even after factoring in the acquisition. The chief application 
for the company's products is in tire markets across the world. Earnings have 
been susceptible to downturns in the automobile industry and economy, though a 
meaningful portion of the demand for carbon black is for replacement tires, 
which is not directly dependent on automobile production. 

Norit is the largest global producer of activated carbon--in a market valued 
at about $1.5 billion globally--and generates approximately half of its 
revenues in the U.S. Norit's activated carbon products are generally critical 
inputs into its customers' products and processes, with demand resulting from 
a high value proposition, legislation, and a growing awareness of 
environmental issues. The company's global market leadership position and 
well-diversified geographic markets contribute to a favorable competitive 
position. Customers, including power-generating plants, food and beverage 
producers, and automobile producers, use Norit's products to meet pollution 
regulations and improve product quality. These factors contribute to the 
company's high profitability, with EBITDA margins above 25%, stability in 
earnings, and predictable end-market demand.

We expect Cabot's financial risk profile to weaken as a result of an increase 
in debt related to the acquisition. Pro forma for the acquisition we expect 
the ratio of funds from operations to total debt to be slightly below 30% as 
of March 31, 2012, a level we consider somewhat weak for the ratings. We 
expect the ratio to improve to between 35% and 40% over the next 12 to 24 
months to support the ratings. Our expectation is that an improvement in 
earnings in both businesses, combined with a reduction in debt, will drive 
this improvement in key credit metrics. We expect the company will use at 
least $226 million, which is a minimum expected amount of remaining proceeds 
from its January 2012 sale of its mainly tantalum-related supermetals 
business, to reduce debt over the next 12 to 24 months.


Liquidity
Liquidity is "adequate." As of March 31, 2012, Cabot had no drawings under its 
$550 million revolving credit facility and about $366 million in cash. We 
expect that sources of funds will at least equal 1.2x uses of funds over the 
next 12 months. We also expect that EBITDA cushions under covenants will be at 
least 15%. Other assumptions and expectations include:

     -- The company will increase its revolving credit facility to at least 
$750 million from the current $550 million, as planned.
     -- The company will use about $250 million of the revolving credit 
facility and $250 million of cash to fund part of the acquisition, in addition 
to the $600 million in unsecured notes.
     -- Free cash flow will be positive in the future, though it could be 
lower in years of increased capital spending.
     -- The company will be prudent with discretionary elements of growth 
capital spending, including those in the activated carbon business, and in 
pursuing shareholder rewards.
     -- The company will use surplus cash to pay down modest amounts of debt 
over the next 24 months, including the potential receipt of additional 
proceeds from the sale of the supermetals business.



Outlook
The negative outlook reflects the risk that an unexpected slowdown in 
operating performance, integration-related challenges, or unanticipated 
constrains on liquidity could prevent the improvement we expect for the 
company's leverage-related credit metrics. We would the lower ratings if the 
key ratio of funds from operations to total debt falls below our expectation 
for an improvement to 35% to 40% and appears likely to remain below 30% over 
the next 12 to 24 months. This could happen if revenue growth stalls or turns 
negative, or if combined EBITDA margins are in the low- to mid-teens 
percentage area. Our ratings assume management's commitment to maintaining 
credit quality, including using surplus cash primarily to reduce debt. If 
management adheres to these objectives and operating results improve as we 
expect, we would likely revise the outlook to stable during the next two years.

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27,2009

Ratings List
Ratings Affirmed; Removed From CreditWatch; Outlook Action
                                        To                 From
Cabot Corp.
 Corporate Credit Rating                BBB+/Negative/--   BBB+/Watch Neg/--

Ratings Affirmed; Removed From CreditWatch

Cabot Corp.
 Senior Unsecured                       BBB+               BBB+/Watch Neg

Cabot Finance B.V.
 Senior Unsecured                       BBB+               BBB+/Watch Neg

New Rating

Cabot Corp.
 Sr Unscd $300 mil. notes due 2018      BBB+               
 Sr Unscd $300 mil. notes due 2020      BBB+


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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