Fitch Ratings has affirmed Albemarle Corporation's (NYSE: ALB, Albemarle) Issuer Default Rating (IDR) at 'BBB-'. A complete list of ratings actions follows at the end of this release.
Albemarle's ratings reflect the company's leading market position in bromine, lithium, refining catalysts, and surface treatment chemicals which generate high margins and strong cash flow. The ratings also reflect high leverage following the January 2015 acquisition of Rockwood Holdings, Inc. and Fitch's expectation that free cash flow will be applied to debt reduction lowering total debt-to-EBITDA to below 3x by the end of 2018.
HEIGHTENED LEVERAGE
Albemarle completed the acquisition of Rockwood Holdings, Inc. in January 2015 for a purchase price of approximately $5.7 billion, comprised of about $3.6 billion in cash and $2 billion in equity. Albemarle reported net debt-to-adjusted-EBITDA of around 3.5x at March 31, 2016 and reiterated its focus on de-levering. The company expects to reach its target leverage of 2.5x by the end of 2017/beginning of 2018 and has suspended its share repurchase program until leverage reaches that level.
OLIGOPOLISTIC MARKETS
The markets for bromine, lithium, and fluid catalytic cracking (FCC) catalysts are highly concentrated and Albemarle is a key player benefiting from low-cost production and pricing power. The company is the second largest bromine producer after Israel Chemicals Ltd., the largest lithium producer including Albemarle's share of the Talison joint venture production, and the second largest FCC catalysts producer after W.R. Grace. Market positions are supported by significant barriers to entry: for bromine and lithium, access to low cost minerals and for FCC, technology and track record.
Fitch calculates LTM March 31, 2016 adjusted EBITDA (margin), as presented by Albemarle, for Bromine Specialties, Lithium and Advanced Materials and Refining Solutions of $231.3 million (30%), $321.7 million (38%), and $210.5 million (29%), respectively.
FAVORABLE GROWTH TRENDS
Lithium demand should grow along with demand for consumer electronics, applications for electric vehicles, and grid storage. Albemarle's lithium business benefits from its market-leading lithium position, low cost supply, ongoing investments in capacity growth, and diversity of resources. Catalysts should benefit from rising fuel consumption, the global trend toward heavier fuel and stringent air quality mandates. Surface treatment products should grow with aerospace and automotive production.
EXPOSURE TO HYDROCARBON DRILLING
Demand for bromine for drilling completion fluids slowed beginning in the fourth quarter of 2014 but was supported by the landscape of late stage projects and producing wells at the start of the down cycle. The dearth of new drilling is expected to play into lower demand for completion fluids into the second half of 2016. The Clean Fuel Technology segment sales suffered in 2015 on delayed change-outs and cost-control measures by refiners, but this appears to be reversing.
Strong Cash Flow Generation
Management guides to 2016 adjusted EBITDA between $920 million and $970 million on net sales of between $3.3 billion and $3.6 billion representing margins of at least 26%. Management guides to free cash flow before dividends and pension contributions of between $450 million and $550 million. Fitch expects operating EBITDA of at least $900 million in 2016 with growth thereafter and free cash flow after dividends of at least $300 million per year on average.
KEY ASSUMPTIONS
–Revenues forecast to be down roughly 7% in 2016 before rebounding modestly;
–EBITDA margins roughly 27%;
–Capital expenditures at guidance in 2016 and modestly higher in 2017;
–Excess cash flow to be used to repay commercial paper and the term loan.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action are not expected over the next 18 months but include:
–Total debt to operating EBITDA sustainably below 2x.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
–Failure to make substantial progress toward de-levering over the next 18 months;
–Expectations of total debt/EBITDA above 3x at the end of 2018; and
–Expectations that annual free cash flow would be materially below Fitch's base case forecast.
SUFFICIENT LIQUIDITY
Albemarle has a $1 billion revolving credit facility maturing in 2020 to support its commercial paper (CP) program (issuance reduces availability) and for general corporate purposes. The leverage covenant is 4.50x for 2015 and then steps down by 0.25x each quarter until reaching 3.50x by the end of 2016. Fitch expects the company to remain in compliance with its covenants and for free cash generation to be sufficient for de-levering.
MODEST DEBT MATURITIES
Annual scheduled maturities of debt over the next five years are $484.8 million in 2016 (CP at $478.1 million), $59.1 million in 2017, $86.4 million in 2018, $335.5 million in 2019 and $1.5 billion in 2020.
FULL LIST OF RATING ACTIONS
Fitch affirms Albemarle's ratings as follows:
–Long-term IDR at 'BBB-';
–Short-term IDR at 'F3';
–Commercial Paper at 'F3';
–Senior unsecured credit facilities at 'BBB-';
–Senior unsecured notes at 'BBB-'.
The Rating Outlook is Stable.
The material has been provided by InstaForex Company – www.instaforex.com