Fitch Rates Eastman Chemical's Senior Notes 'BBB'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'BBB' to Eastman Chemical Co.'s (Eastman) issuance of senior unsecured notes. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

Eastman intends to use the proceeds from the offering to partially fund the redemption of the 2017 and 2018 notes, a tender for portions of the 2021 to 2027 notes, and for general corporate purposes.

KEY RATING DRIVERS

COMPANY PROFILE

The company's ratings reflect Eastman's diversity of chemical products, strong market positions in key end user markets, vertical integration of production along its acetyl, polyester and olefin product chains, access to low cost North American feedstocks and consistent, strong operating margins that have historically translated to strong free cash flow (FCF) generation. Eastman's ratings are also supported by the company's ongoing portfolio high-grading, with shedding of lower margin, commoditized businesses and expansions into higher margin, higher growth businesses. Offsetting factors include the company's exposure to volatility in raw materials and energy costs, specifically olefins and methanol, global macroeconomic environment headwinds, and a continued period of heightened leverage stemming from the company's 2014 acquisitions.

INCREASING SPECIALTY, REDUCED COMMODITY EXPOSURE EXPECTED

Fitch expects Eastman to continue to improve its portfolio mix as higher-margin products expand and the company sheds much of its exposure to its commoditized portfolio. Over two-thirds of 2016 operating profit was attributed to the Additives and Functional Products and Advanced Materials segments, both of which have EBITDA margins of over 20%. Fitch expects faster growth in higher margin product lines like its Crystex, Tritan, and Aerafin product lines to increase overall margins over time as well, as the company expands to other high-growth applications in healthcare, personal care, and automotive production. The Taminco business lines have further diversified Eastman's customer base into attractive bio-centric markets while leveraging Eastman's technology and feedstock advantages.

The company's commodity olefin price exposure should also drop within the next few years, as the company looks to divest its excess merchant ethylene production and start receiving additional contracted propylene from Enterpise Products Partners L.P.'s new plant, now slated to come online in the first half of 2017. These actions would increase vertical integrations of the company's specialty product lines and reduce earnings volatility going forward.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Revenue of $8.7 billion in 2016, increasing to over $9 billion by the end of 2018;

--2016 capex at higher end of guidance of $600 million to $625 million;

--EBITDA margin at 24% in 2016, increasing to over 25% as cost savings and synergies from acquired businesses flow through, and hedges that currently have a net negative impact on earnings expire;

--Repayment of an additional $300 million of debt by end of 2016 ($1 billion total in 2015 - 2016), with repayments at approximately the rate of the company's maturity schedule going forward;

--Dividends and pension contributions within company guidance.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

--Total debt to EBITDA of less than 1.5x on sustained basis in combination expectations of annual FCF over $1 billion.

Negative: Future developments that could lead to negative rating actions include:

--Debt/EBITDA above 2.5x on a sustained basis;

--Sustained negative FCF leading to incremental borrowings;

--Leveraging events: debt financed share repurchases, additional leveraging acquisitions, etc.;

--A major operational issue or global recession which pushes EBITDA lower on a sustained basis and is not offset by adjustments in Eastman's cost structure.

FULL LIST OF RATINGS

Fitch currently rates Eastman as follows:

--Long-Term Issuer Default Rating (IDR) 'BBB';

--Senior unsecured revolving credit facility 'BBB';

--Senior unsecured notes/debentures/term loan 'BBB';

--Short-Term IDR 'F2';

--Commercial Paper 'F2'.

Fitch has assigned the following rating:

--Senior unsecured Euro notes 'BBB'.

The Rating Outlook is Stable.

LIQUIDITY

Liquidity is provided by an undrawn $1.25 billion unsecured credit facility (due October 2021). The credit facility backstops Eastman's commercial paper program, and there was $1 billion available due to $175 million of commercial paper outstanding as of Sept. 30, 2016. At Sept. 30, 2016, total liquidity was $1.7 billion including $207 million of cash on the balance sheet and $200 million of availability on the company's $250 million A/R facility. Pro forma for third-quarter transactions, material near to intermediate term maturities are the $250 million senior notes due 2019 and term loan due 2019.

Date of Relevant Rating Committee: Aug. 22, 2016

Additional information is available on www.fitchratings.com.

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS

Fitch has made no material adjustments that are not disclosed within the company's public filings.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)https://www.fitchratings.com/site/re/869362

Additional Disclosures

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014857

Endorsement Policyhttps://www.fitchratings.com/regulatory

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Fitch Ratings
Primary Analyst:
Greg Fodell, +1-312-368-3117
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Mark C. Sadeghian, CFA, +1-312-368-2090
Senior Director
or
Committee Chairperson:
Monica Bonar, +1-212-908-0579
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
[email protected]

Source: Fitch Ratings

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