Fitch Rates Dow Chemical's Proposed $2.5B Note Issuance 'BBB'; Outlook
CHICAGO -- November 06, 2012
Fitch Ratings has assigned a 'BBB' rating to Dow Chemical Company's (Dow)
proposed $2.5 billion issuance of notes with 10 and 30 year maturities. The
Rating Outlook is Stable. A complete list of ratings is provided at the end of
The notes will be senior unsecured obligations of Dow and will rank equally
with other senior unsecured obligations which comprise most of the company's
$20.4 billion of debt as of Sept. 30, 2012. However, $4.7 billion of
subsidiary indebtedness would be structurally superior to the notes. Dow plans
to use the proceeds to repay debt and for general corporate purposes. The
notes are being issued under the company's indenture dated May 1, 2008. Key
covenants include restrictions on secured debt, restrictions on sale and
leaseback transactions, and mergers and asset sales. There are no financial
covenants. The notes will have make whole call provisions as well as a put
option upon a change of control and a downgrade of the notes below investment
The ratings reflect Dow's position as the largest North American chemical
company with approximately $57 billion of revenues in the last 12 months (LTM)
ending Sept. 30, 2012, its highly integrated production streams, which result
in significant economies of scale and scope, and leading market positions in
many commodity and specialty chemicals segments. These ratings strengths are
partly offset by the moderately levered capital structure, following the Rohm
and Haas acquisition, and moderate cash flows impacted by significant working
The ratings are constrained by moderate cash flows, particularly when
considered in relation to debt. LTM to Sept. 30, 2012, Dow's cash flow from
operations totaled $4.5 billion after Fitch calculated high negative working
capital changes of $2.6 billion. Free cash flow (LTM) was $289 million after
$2.7 billion of capital expenditures and $1.6 billion of dividends including
Fitch expects the company to marginally improve operating cash flow generation
over the next several quarters, given longer-term favorable volume and margin
trends. Fitch also notes that the company has pulled back on capital
expenditures and will execute a restructuring program, which should improve
cash flow. However, a portion of the expected improvements will be offset by
the company's 28% dividend increase announced earlier this year and cash
outlays incurred related to the restructuring. This drives Fitch's expectation
for Dow being free cash flow neutral in 2012. Fitch expects Dow to generally
produce material positive FCF in future years.
Dow has announced multiple expansions of its North American ethylene and
propylene capacity in order to take advantage of low feedstock costs. These
expansions are expected to increase the company's capital expenditures over
the next few years. However, the risks are mitigated by opportunities in
domestic and export markets for Dow's downstream products, which likely offer
good margins and competitive advantages from low feedstock costs.
The Stable Outlook reflects Dow's robust liquidity. As of Sept. 30, 2012,
Dow's liquidity totaled $8.9 billion, consisting of $3.9 billion cash on hand
and $5.0 billion available under its undrawn revolving credit facility. The
facility is governed by a debt to capital covenant maximum of 65%. The
covenant is only applicable, if more than $500 million are outstanding under
the facility. The revolver will expire in October 2016.
The company's robust liquidity makes upcoming debt maturities manageable. Dow
has maturities of $1.1 billion remaining in 2012, $0.7 billion in 2013, $2.4
billion in 2014, $1.5 billion in 2015, and $1.0 billion in 2016. Another risk
mitigant is the company's proven ability to execute sizeable capital markets
transactions to refinance debt as necessary.
Union Carbide is a wholly-owned subsidiary of Dow Chemical, and its rating is
based on the high degree of financial, legal and business integration into
Dow's operations. While the close integration would justify equalizing the
rating, the one notch rating difference reflects Union Carbide's still
sizeable exposure to asbestos litigation.
The rating of the Rohm and Haas' notes and debentures is based on the
unconditional and irrevocable guarantee from Dow Chemical.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Material progress in deleveraging the balance sheet;
--Operating performance improvements which strengthen Dow's cash flow
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--A return of adverse economic conditions for the chemical industry leading to
deteriorating sales and profits;
--Expectations for prolonged meaningful negative FCF.
Fitch currently rates Dow as follows:
Dow Chemical Company
--Long-term IDR 'BBB';
--Senior unsecured revolving credit facility 'BBB';
--Senior unsecured debt 'BBB';
--Short-term IDR 'F2';
--CP ratings 'F2'.
Dow Capital BV
--Long-term IDR 'BBB';
--Senior unsecured debt 'BBB'.
Union Carbide Corporation (Union Carbide)
--Long-term IDR 'BBB-';
--Senior unsecured debt 'BBB-'.
Rohm and Haas Company (Rohm and Haas)
--Senior unsecured debentures and notes guaranteed by Dow Chemical 'BBB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Chemical Companies,' (May 13, 2010).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Chemical Companies
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Christopher M. Collins, CFA, +1 312-368-3196
70 W. Madison Street
Chicago, IL 60602
Sean T. Sexton, CFA, +1 312-368-3130
Jason Pompeii, +1 312-368-3210
Brian Bertsch, +1 212-908-0549
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