-- Boston, Mass.-based Cabot Corp. plans to establish a $750
million commercial paper program.
-- We are assigning our 'A-2' short-term credit rating to the company and
'A-2' commercial paper rating to the proposed program.
-- In addition, we are affirming our 'BBB+' corporate credit rating on
-- The negative outlook on Cabot reflects the risk that ratings could be
lowered if operating results weaken unexpectedly or integration-related
challenges constrain expected improvement to the company's leverage-related
On Jan. 11, 2013, Standard & Poor's Ratings Services assigned its
'A-2'commercial paper rating to Cabot Corp.'s $750 million commercial paper
program and 'A-2' short-term rating to the company. At the same time, we
affirmed the 'BBB+' corporate credit rating on Cabot. The outlook remains
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, carbon black and related products.
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 is investing to expand
capacity overseas including in China and South America. 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.
In July 2012 the company acquired Norit N.V., for $1.1 billion, a producer of
activated carbon products. We view the acquisition as consistent with
strategic objectives 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. We expect that Cabot's operating margins will
benefit in fiscal 2013 and beyond from the addition of Norit, which has a
track record of attractive profitability with EBITDA margins in the 25% area.
Cabot's pre-acquisition EBITDA margins were 13% to 16% in the recent past,
except during the economic downturn in 2008 and 2009 when margins declined
sharply. Through the Norit acquisition Cabot is the largest global producer of
activated carbon--in a niche market valued at about $1.5 billion globally.
Cabot'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.
Still, the higher-margin activated carbon business is a small portion of the
combined company contributing to only 10% of combined pro forma revenues for
Our base case scenario assumes that Cabot's EBITDA in fiscal 2013 will be an
improvement over 2012 based on the following observations and assumptions:
The addition of EBITDA from Norit's business is expected to more than offset
EBITDA lost due to the 2012 sale of the "supermetals" business.
We expect some pricing and volume improvements partly from improving economic
conditions across the globe despite ongoing weakness in European markets.
In particular we expect the company to benefit from new capacity in fast
growing regions including China.
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 specialty carbons and compounds (formerly known as 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.
We expect Cabot's leverage-related credit ratios to gradually strengthen to
levels appropriate for the current rating. Ratios weakened as a result of an
increase in debt related to the Norit acquisition. We expect the ratio of
funds from operations to total debt be slightly below 30% as of Sept. 30,
2013, 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, 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
Liquidity is "adequate." As of Sept. 30, 2012, Cabot had $560 million
available under its $750 million revolving credit facility and about $120
million in cash. We expect that sources of funds will be at least 1.2x the
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
Free cash flow will be positive in the future, despite our expectation of some
volatility in working capital requirements. Working capital requirements are
vulnerable to price increases in the company's hydrocarbon-based raw material
The company will be prudent with discretionary elements of growth capital
spending, including those in the activated carbon business, and in pursuing
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.
The negative outlook reflects the risk that an unexpected slowdown in
operating performance or integration-related challenges could prevent the
improvement we expect for the company's leverage-related credit metrics. We
would lower ratings modestly 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 at least a couple of percentage points below the 16% we assume in
Our ratings assume management's commitment to maintaining credit quality will
not waver, 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 year.
Related Criteria And Research
-- Methodology: Management And Governance Credit Factors For Corporate
Entities And Insurers, Nov. 13, 2012
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Commercial Paper, April 15, 2008
-- Key Credit Factors: Criteria For Rating Companies In The Global
Commodity Chemicals Industry, Sept. 19, 2012
-- Key Credit Factors: Business and Financial Risks In The Commodity And
Specialty Chemical Industry, Nov. 20, 2008
-- Methodology: Short-Term/Long-Term Ratings Linkage Criteria For
Corporate And Sovereign Issuers, May 15, 2012
Rating Affirmed; New Rating
Corporate Credit Rating BBB+/Negative/A-2 BBB+/Negative/NR
Commercial Paper A-2
Senior Unsecured BBB+
Cabot Finance B.V.
Senior Unsecured BBB+