-- U.S. industrial gas producer Praxair Inc. is issuing $500 million
in notes due 2022; the company is drawing the notes from an existing shelf
registration. Praxair will use proceeds for general corporate purposes.
-- We are affirming all of our ratings, including the 'A' long-term and
'A-1' short-term corporate credit ratings, on Praxair. We are also assigning
our 'A' senior unsecured debt rating to the company's notes.
-- The stable outlook incorporates our view that Praxair's strong project
backlog will likely support higher earnings in the next few years.
On July 30, 2012, Standard & Poor's Ratings Services affirmed its 'A'
long-term and 'A-1' short-term corporate credit ratings on Danbury,
Conn.-based Praxair Inc. At the same time, we assigned our 'A' senior
unsecured debt rating to the company's $500 million notes due 2022. The
company is drawing the notes from an existing shelf registration. The outlook
The ratings on Praxair, a leading industrial gas producer, reflect its
excellent business profile, the impressive resilience of its cash flows and
operating margins, and credit metrics that are consistent with our
expectations. These strengths, along with the substantial percentage of its
revenues that are under long-term contracts, allow Praxair to pursue
moderate-size acquisitions and repurchase shares while maintaining credit
quality. However, we believe the capital intensity of the business, numerous
investment opportunities, and the cyclicality of some key industrial end
markets remain tempering factors.
Long-term fundamentals for the industrial gases market remain attractive
worldwide, with industrial production growth rates of 1.5% to 2.0%, stable
cash flows, high barriers to entry, and a wide variety of industries served.
Praxair's business position also benefits from significant sales diversity,
including a dominant market share in South America, and an expanding business
in China and India. Praxair expects its sales to emerging countries, currently
36% of total sales, to increase to 45% of sales by 2015.
Over the next several years, we expect Praxair's sales and return on capital
(currently 18%) to continue to benefit from management's focus on a variety of
-- Building hydrogen plants to support new business with refiners along
the company's U.S. Gulf Coast pipeline and in emerging markets around the
-- Capital investments in China, Korea, and India for onsite capacity to
supply electronics, petrochemicals, steel facilities, and other industries;
-- Supplying nitrogen and carbon dioxide to help drillers fracture rock
formations and for enhanced oil recovery; and
-- Providing technology to enable customers to burn fuel (primarily
natural gas) more efficiently, capture and sequester carbon dioxide more
effectively, and reduce the amount of sludge in wastewater.
Praxair's project backlog was $2.5 billion as of June 30, 2012, and most of
the new projects are energy related and in emerging markets. EBITDA margins
remain robust in the low-30% area and in the top tier of chemical companies.
The key ratio of funds from operations (FFO) to total adjusted debt (taking
into consideration capitalized operating leases and underfunded pension and
postretirement benefits obligations) was 35% as of June 30, 2012, and is in
the 35% to 40% range that we consider appropriate for the ratings. Praxair
invested about $51 million in acquisitions in the first six months of 2012,
and we expect acquisition-related outlays to remain manageable.
We view Praxair's liquidity as "strong" under our criteria. Our 'A-1'
short-term rating on Praxair incorporates the ample availability under its
revolving credit facilities and its solid cash flow generation. The credit
facilities include a $1.75 billion credit facility expiring in 2016 and a $400
million multicurrency facility in Europe expiring in November 2012.
Other relevant aspects of our assessment of the company's liquidity profile
-- Sources of liquidity over the next year will exceed uses by 1.5x or
-- Net sources should be positive, and we expect the company to remain
in compliance with covenants, even with a 30% drop in EBITDA or a 25% increase
in debt; and
-- Praxair could likely absorb low-probability shocks due to its positive
cash flow from operations and available liquidity.
As of June 30, 2012, Praxair had cash and cash equivalents of $104 million.
The company will likely continue to direct its free cash flow to potential
acquisitions, common share repurchases, and dividends. It completed $313
million of share repurchases in the first six months of 2012.
Praxair expects its capital expenditures to be approximately $2.1 billion to
$2.4 billion in 2012, which is substantial and above the long-term capital
reinvestment rate of 10% to 15% of sales. A major portion of capital outlays
will be for new production plants, mostly for onsite air-separation facilities
backed by 15-year take-or-pay contracts with customers. The remainder is for
cost-reduction and maintenance programs.
In September 2010, the Brazilian Administrative Council for Economic Defense
alleged anticompetitive activity among industrial gas companies in Brazil and
imposed a civil fine of $1 billion on the Brazil-based subsidiary of Praxair.
In response, the company filed an annulment petition with the federal court in
Brasilia seeking to have the fine overturned. Appeals in Brazil have
historically taken many years to resolve, so the timing of the appeal decision
The outlook is stable. Praxair's strong project backlog supports prospects
that net income will continue to grow. These earnings enhance Praxair's
ability to address heavy capital investments, periodic acquisitions, and
common stock repurchases, while sustaining appropriate financial ratios
throughout the business cycle. In our view, a significant departure from the
expected financial and operating strategies, including a
larger-than-anticipated acquisition, could challenge the key underpinnings of
the ratings. Although we do not currently expect to do so, we could lower the
ratings if sizable acquisitions and share repurchases result in FFO to total
adjusted debt deteriorating to less than 30% without clear prospects for
recovery. On the other hand, we could raise the ratings if Praxair's financial
profile improved such that FFO to total adjusted debt is sustained in the 40%
to 45% range.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- Industrials: Key Credit Factors: Business And Financial Risks In The
Commodity And Specialty Chemical Industry, Nov. 20, 2008
Corporate credit rating A/Stable/A-1
Senior unsecured A
Commercial paper A-1
$500M sr unsecd notes due 2022 A