Close

Moody's Affirms Ratings of Eastman Chemical (EMN) Following Taminco (TAM) Bid

September 12, 2014 9:25 AM EDT

Moody's Investors Service affirmed Eastman Chemical Company's (NYSE: EMN) Baa2 and Prime-2 ratings and maintained its stable outlook, following Eastman's announcement that it has signed a definitive agreement with Taminco Corporation (NYSE: TAM)(Taminco) and its largest shareholder (an affiliate of Apollo Management) to acquire the company for $26 per share in cash. This values the company at $2.8 billion, including approximately $1 billion of balance sheet debt. Moody's also placed the ratings of Taminco Global Chemical Corporation (B2 Corporate Family Rating; a wholly owned subsidiary of Taminco) under review for upgrade. Eastman expects to fund the transaction with a combination of term loans and senior unsecured notes. The proposed transaction is subject to a thirty day "go shop" period where Apollo will seek to obtain a higher value for the company, as well as normal regulatory approvals. Eastman expects the transaction to close by the end of 2014.

"Despite Eastman's rapid debt reduction following the Solutia acquisition in 2012, another large debt-financed acquisition leaves very little flexibility in the rating," stated John Rogers, Senior Vice President at Moody's. "We expect Eastman to use the vast majority of its free cash flow over the next two years to reduce debt, and return credit metrics to levels that are fully supportive of the rating by the end of 2016."

Taminco's ratings will remain under review until the close of the transaction and will be withdrawn upon repayment of outstanding rated obligations.

Ratings affirmed:

Eastman Chemical Company

..LT Issuer Rating of Baa2

..Senior Unsecured (domestic currency) Rating of Baa2

..Senior Unsec. Shelf (domestic currency) Rating of (P)Baa2

..Pref. Shelf (domestic currency) Rating of (P)Ba1

..Preferred shelf -- PS2 (domestic currency) Rating of (P)Ba1

..Commercial Paper (domestic currency) Rating of P-2

Outlook, Remains Stable

Ratings placed under review for upgrade:

Taminco Global Chemical Corporation

..LT Corporate Family Ratings of B2

..Probability of Default Rating of B2-PD

..First priority senior secured credit facility ratings of B1 -- LGD3

..Second priority senior secured notes ratings of Caa1 -- LGD5

..Speculative Grade Liquidity Rating, unchanged at SGL-2

....Outlook, Changed To Rating Under Review From Stable

RATINGS RATIONALE

The affirmation of Eastman's ratings assumes that the transaction is completed at the $26 per share price and reflects the company's prior track record of integrating acquisitions, and subsequent debt reduction, especially the large Solutia transaction in 2012. The ratings are also supported by Eastman's size, relatively diverse product portfolio and specialty EBITDA margins in its five business segments. Additionally, Eastman's strong free cash flow generation from existing operations supports its ability to quickly de-lever to levels more appropriate for the rating category within the subsequent 18-24 months. Even with elevated capital spending in 2015 and 2016, related to previously announced capacity expansions, Eastman should generate enough free cash flow to repay more than $1 billion of debt. Taminco represents a new product line for Eastman based on alkylamine chemistry. However, it is a good complementary fit with Eastman's existing businesses as its provides the opportunity increase its backward integration into low-cost feedstocks (i.e., methanol and ammonia), and should provide a reasonable level of synergies.

The primary factor constraining the ratings will be Eastman's elevated leverage after the close of the transaction, with pro forma Debt/EBITDA estimated to be about 3.7x, more than a full turn higher than its existing leverage. The fact that the acquisition will be funded entirely with debt is also a credit negative, whereas the Solutia acquisition, while larger, was partially funded with equity. Integration risks and the realization of synergies outlined by management are a lesser concern given Eastman's prior track record.

Eastman is paying a 12% premium over Taminco's average stock price over the last 20 trading days. If other buyers emerge for Taminco during the 30 day "go shop" period and Eastman agrees to pay a higher price for the company (more than 10% higher), Moody's could put Eastman's ratings under review for possible downgrade.

Eastman's Prime -- 2 commercial paper rating is supported by its $1 billion revolving credit facility, which backstops its commercial paper program. Eastman had $451 million of outstanding commercial paper borrowings as of June 30, 2014. The company's existing operations also generate good free cash flow, which will fund elevated capital expenditures in 2015 and 2016 and provide the flexibility to reduce debt. The company also maintains an undrawn $250 million Accounts Receivable Securitization facility due in 2016, which further improves its liquidity.

The stable outlook reflects Eastman's specialty margins, expectation for good free cash flow generation and managements track record in successfully integrating acquisitions. Eastman's rating could come under pressure if it significantly increases its bid for Taminco, or subsequent to the acquisition, fails to reduce Debt/EBITDA below 2.8x by the end of 2016. There will be very little upside to Eastman's rating over the next two years due to this potential acquisition and the time required to reduce leverage to a level that fully supports the rating (i.e., 2.5x Debt/EBITDA, 25% Retained Cash Flow/Debt and 12% Free Cash Flow/Debt).



Serious News for Serious Traders! Try StreetInsider.com Premium Free!

You May Also Be Interested In





Related Categories

Credit Ratings

Related Entities

Apollo Management, Moody's Investors Service, Definitive Agreement