Fitch Rates Methanex's Proposed $300MM Notes 'BBB-'; Outlook Stable
CHICAGO -- December 12, 2012
Fitch Ratings has assigned a 'BBB-' rating to Methanex Corporation's
(Methanex) proposed $300 million issuance of 7-year notes. The Rating Outlook
is Stable. A complete list of ratings is provided at the end of this release.
The proposed senior notes will be unsecured obligations ranked pari passu with
the company's existing unsecured notes. Borrowings at subsidiaries such as
those used to finance the company's EMethanex and Atlas plants are
structurally superior to the notes. Methanex plans to use the proceeds for
capital expenditures and other general corporate purposes. The notes are being
issued under the company's indenture dated July 20, 1995. Key covenants
include restrictions on secured debt, sale and leaseback transactions, certain
subsidiaries' ability to incur debt without guaranteeing the proposed notes,
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 ratings decline.
Methanex's ratings reflect the company's position as the largest supplier of
methanol, its global distribution network, relatively low production costs
within the industry, increased geographical diversification, operating
leverage to the wide oil-natural gas spread, and conservative financial
management. Rating limitations include the company's single-product focus,
planned capital expenditures relating to its relocation of Chilean capacity to
Geismar, Louisiana, and output constraints facing its remaining Chile plants.
Methanex's Chilean plants have been underutilized for a number of years due to
the disrupted natural gas imports from Argentina. Methanex has supplemented
lost volumes with higher levels of purchased and commissioned methanol sales,
but margins on these sales are significantly lower than on Methanex's own
production. To address this, the company is in the process of dismantling one
plant capable of producing one million tonnes per year, relocating it to
Geismar and reassembling it. The company received air rights for the relocated
plant on Nov. 13, 2012. Fitch believes it is likely the company will relocate
a second Chilean plant in Geismar. While the relocation will save the company
substantially in comparison to a greenfield plant, Methanex expects to spend
approximately $500 million in relocating one plant and roughly $1 billion
Methanex's margins in the past two years have benefited from advantageous
methanol pricing. Methanol prices have been supported by energy-related uses
linked to Brent crude pricing, significant and growing Chinese demand, and
rational industry capacity. Fitch anticipates these factors to continue to
support methanol prices. Methanex's margins are expected to benefit further
when they are able to capture the operating margin from Geismar-produced
methanol. Methanex's Geismar facility will be able to benefit from low-priced
natural gas which is expected to prevail for the near-to-intermediate term due
to the North American shale boom. Natural gas is the feedstock and largest
cost item for Methanex's methanol production process. In addition, since
issues in Chile first erupted, the company has ramped up production in several
other locations including Egypt, New Zealand, and Medicine Hat. On a pro forma
basis following the relocation of two plants to Geismar, Fitch anticipates
just 21% of the company's nameplate capacity will be in Chile, versus a level
as high as 56% in 2009.
Methanex solely produces and markets methanol, which has a variety of end
uses, from feedstock for formaldehyde and acetic acid in the chemical
production chain to energy-related uses in fuel blending. The more traditional
uses in the chemical production chain tend to grow with global production
while energy-related uses are growing at a faster rate. Methanex produces
methanol in Canada, Chile, Egypt, New Zealand and Trinidad and soon, with the
Geismar facility, the United States, which diversifies the company's
production and reduces risks related to natural gas supply constraints.
The company's credit statistics have remained stable in 2012 as methanol
prices have remained relatively stable year over year. As calculated by Fitch,
Methanex's debt/EBITDA decreased from 1.93x in 2011 to 1.89x at Sept. 30,
2012. For the LTM ending Sept. 30, 2012, Fitch-calculated EBITDA/gross
interest was 6.84x, and funds from operations interest coverage was 7.24x,
versus 7.26x and 7.82x, respectively, in 2011. Free cash flow (FCF) has been
strong with $240 million in the LTM period ended Sept. 30, 2012. With
significant capital spend relating to its plant relocations and anticipated
restarting of New Zealand capacity, Fitch expects FCF to be moderately
negative in 2013 and 2014.
Methanex has a substantial liquidity position totaling $603 million as of
Sept. 30, 2012 with $403 million in cash and an undrawn $200 million revolver
that expires mid-2015. The company has a light maturity schedule with only
amortizations of its limited recourse project financing (2013: $53 million,
2014: $62 million) until its $150 million 6% notes mature on Aug. 15, 2015.
Financial covenants contained in the company's revolving credit facility
include a debt-to-capitalization ratio of 50% and minimum interest coverage
ratio of 2x, both of which the company met comfortably as of Sept. 30, 2012.
The company also has a limitation on secured debt included in the revolver and
Fitch notes that Methanex's contracts with gas suppliers offer a measure of
downside protection for creditors - contracts at several of the company's
methanol plants allow Methanex to pay low base natural gas prices but share
the upside with natural gas suppliers when methanol prices rise above certain
levels. From a creditor perspective, this helps the company by lowering its
cost structure under depressed methanol pricing conditions. Supply contracts
with this structure include Egypt, Trinidad, and the recently announced New
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that could lead to positive rating actions
--Increased product diversification;
--Successful relocation and restart of Chilean plants in Geismar coincident
with attractive methanol prices supported by positive demand trends.
Negative: Future developments that could lead to negative rating actions
--Sustained period of methanol overcapacity depressing pricing and margins;
--A leveraging transaction moving debt to EBITDA above 3.5x on a sustained
--Large share repurchases or special dividends financed by debt.
Fitch currently rates Methanex as follows:
--Long-term Issuer Default Rating 'BBB-';
--Senior unsecured revolving credit facility 'BBB-';
--Senior unsecured notes '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 Relevant Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Chemical Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Rating Chemical Companies
Corporate Rating Methodology
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Christopher M. Collins, CFA, +1-312-368-3196
70 W. Madison Street
Chicago, IL 60602
Mark C. Sadeghian, CFA, +1-312-368-2090
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