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.
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.
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.
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
--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
--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.