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S&P Lowers Outlook on DuPont (DD) to Negative; Activist Investor Poses Potential Credit Risk

January 12, 2015 9:20 AM EST

Standard & Poor's Ratings Services said today it revised its outlook on DuPont (E.I.) De Nemours & Co. (NYSE: DD) to negative from stable. At the same time, we affirmed our 'A' long-term corporate credit rating and other ratings on the company.

The outlook revision reflects our view that credit risk at our 'A' corporate credit rating on DuPont has increased, following a step-up in an activist investor's effort to gain influence at the company. That investor, Trian Fund Management, announced recently its intention to nominate four individuals for election to DuPont's Board of Directors at an upcoming shareholder meeting. We believe this is an escalation of attempts by Trian to achieve its stated goal for splitting up DuPont's existing business.

"In our view, existing credit quality could deteriorate if DuPont's businesses split up, weakening the current business risk profile, or if this escalation increases the likelihood that management's commitment to its current credit quality wavers, weakening the financial risk profile," said Standard & Poor's credit analyst Paul Kurias.

Our current assessment of DuPont's existing business strengths are a key factor in our ratings, and any diminution of these strengths could have negative credit implications. We base our 'A' corporate credit rating on an upward adjustment to our initial rating outcome (anchor) of 'a-', based on our view that DuPont's competitive position is somewhat better than other companies we deem "strong". In particular, we regard DuPont as having better scale, scope, and diversification than many peers including Air Products & Chemicals Inc., Sherwin-Williams Co., and PPG Industries Inc. Any potential split that results in a weakening of this particular strength could have negative consequence. Our current view of business strengths is also a key factor in our picking the higher of two possible anchor scores ('a-' or 'bbb+') that the "strong" business risk profile and "intermediate" financial risk profile map to. We believe DuPont is currently at the higher end of the "strong" business risk profile.

The negative outlook reflects our view that credit risks at the current ratings have increased. We believe there is a slightly increased possibility that either or both the business risk profile and the financial risk profile could weaken due to the risks discussed here, although in our base case we currently do not anticipate any deterioration. We believe management will strive to maintain credit measures we regard as appropriate for the intermediate financial profile, including FFO to net adjusted debt of 35% to 40%. Although details of the planned separation of the performance chemicals
business are not available yet, we believe management will structure the transaction with a view to preserving DuPont's credit quality.

We could lower the ratings if a break-up of the company or an increased likelihood of a break-up meant that we no longer viewed the business risk profile as being at the very high end of the "strong" category. We could lower ratings if credit measures weakened such that FFO to debt appeared likely to remain below 35%. With DuPont's current portfolio of businesses, we think this could occur if revenues contracted by 3% to 4% and EBITDA margins were two percentage points lower than we expect. We could also lower the ratings if activist shareholder pressure or other factors caused shareholder rewards to increase beyond our current expectations, if acquisitions were larger than we expect, or if adverse litigation stretched the financial profile. We could also lower ratings if we reassess our view of management and governance, and consider it less favorably than we currently do. A downgrade could also occur if the separation of the performance chemicals business caused DuPont's credit measures to deteriorate.



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