S&P Downgrades Westlake Chemical (WLK) to 'BBB' Following Completion of Axiall Deal

September 8, 2016 11:18 AM EDT

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S&P Global Ratings today lowered its ratings, including the corporate credit rating, on Westlake Chemical Corp. (NYSE: WLK) to 'BBB' from 'BBB+' following the closing of its Axiall Corp. acquisition. The outlook is stable. At the same time, we lowered our ratings on the company's existing senior debt to 'BBB' from 'BBB+'. We removed all ratings from CreditWatch with negative implications where we placed them on June 13, 2016, following Westlake's announcement of an agreement with Axiall for the acquisition of Axiall by Westlake.

"The downgrade reflects the increase in debt leverage at Westlake following the all-cash Axiall acquisition," said S&P Global Ratings credit analyst Paul Kurias. "Although the acquisition brings in positive elements to Westlake's business risk profile, including an increase in scale, we continue to assess the business risk profile as satisfactory," he added.

The increase in debt has resulted in the financial risk profile weakening to intermediate from modest.

The stable outlook reflects our view for steady progress in the integration of Axiall's operations and mostly stable demand conditions. We also believe that the combination will result in free cash flow generation to support gradual debt reduction, and assume that management will support steady improvement in leverage related credit metrics. At the current ratings, we anticipate that the key ratio of funds from operations to total debt will be above 30%.

We could lower ratings if integration challenges result in deteriorating operating performance or increased debt levels without indication of any near-term improvement. This could happen if with the company experiences declines in revenue growth and a decline in combined EBITDA margins of several percentage points and result in the ratio of FFO to total debt declining below 30% without prospects for near term improvement.

We could consider a modest one-notch upgrade over the next 24 months if Westlake integrates Axiall and derives synergies faster than anticipated so that EBITDA margins improve well above our expectations in the 20% area. In such a scenario, we would expect FFO to total debt would improve to exceed 45% on a sustainable basis after considering volatility in earnings and cash flow. We wouldn't necessarily raise ratings if Westlake's ratio exceeded 45% for brief periods especially in favorable operating conditions if we believed that volatility inherent in the sector would cause ratios to weaken below that threshold in the near term.

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