Fitch Affirms DuPont's IDRs at 'A/F1'; Outlook Stable
NEW YORK -- August 30, 2013
Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) and
senior unsecured debt ratings at 'A' and the short-term IDR and CP ratings at
'F1' for E.I. DuPont de Nemours and Company (DuPont).
The Rating Outlook is Stable. A full list of ratings is provided at the end of
KEY RATING DRIVERS
The ratings reflect DuPont's strong business profile, robust liquidity, and
substantial free cash flow generation. DuPont benefits from end-market
diversification and global reach (particularly into emerging markets),
integrated operations and leading market positions and brands across multiple
segments. The company's product portfolio is primarily R&D-based and often
patent protected, enabling sustainable market advantages and high operating
Fitch expects DuPont's Agriculture segment to continue its strong operating
performance. The segment accounts for a third of DuPont's annual operating
income and is driven by Pioneer seeds. High crop prices earlier in the year
supported another large number of planted acres in 2013, and this in turn
supported demand and volume for seeds and crop protection. Corn prices have
declined to $5.87/bushel from prices above $8/bushel (Spot Ask, No. 2 Yellow
Corn, Chicago Terminal Elevator, USDA) earlier this year, but this price is
still slightly above the five-year average and much higher than average for
longer periods of time. Farm economics are very strong as a result, and Fitch
anticipates plantings to continue to be high in 2014 and demand for seeds and
crop protection to be sustained.
DuPont is considering its strategic options for DuPont Performance Chemicals,
since it does not conform to the company's long-term strategic plan. DuPont's
Performance Chemicals segment accounts for a significant portion of DuPont's
operating income (over 25% in 2012 but lower in 2013 due to significant
weakness in TiO2 market) and roughly half of its sales are TiO2 products.
DuPont is the largest TiO2 producer worldwide. TiO2 prices are depressed but
prices are cyclical and recovery is expected with more robust global economic
growth. If DuPont divests its performance Chemicals businesses, Fitch expects
a portion of any potential proceeds to be used to repay debt in order to
maintain credit metrics.
DuPont's net debt to EBITDA is in line with Fitch's expectations. Net debt to
operating EBITDA for the LTM period ended June 30, 2013 was 1.3x, meeting
Fitch's expectation of below 1.5x. The company generated $1.5 billion in free
cash flow (FCF) in 2012, meeting Fitch's expectation of greater than $1
billion for that year. This year's expectation is for lower FCF (around $750
million) given lower net income expectations. However, LTM June 30, 2013, FCF
was negative $148 million. This is largely a function of greater working
capital needs related to the Agriculture segment in addition to a decline in
net income from the divestiture of DuPont Performance Coatings (DPC) and
weakness of TiO2. The company should see a reduction in working capital in the
second half of 2013.
Dupont's total debt to EBITDA was 2.5x at June 30, 2013, higher than Fitch's
expectation of 2x or lower. Dupont's recent issuance of $2 billion in notes to
refinance upcoming maturities, along with the retention of $3 billion of the
net proceeds from the divestiture of DPC on the balance sheet, will keep the
company's gross leverage above 2.0x in the near term. DuPont has initiated a
cost cutting plan that it expects will achieve pre-tax cost savings of
approximately $300 million in 2013 increasing to $450 million per year
thereafter. The savings from the plan will offset a large portion of the
operating income lost with the divestiture of DPC. Through growth and
repayment of maturities with cash, Fitch expects DuPont's gross leverage to be
below 2.0x by the end of 2014.
Liquidity should remain strong with expected FCF generation after capital
expenditures and dividends of at least $500 million in 2013, $6.9 billion in
cash on hand and marketable securities and $4.3 billion in available credit at
June 30, 2013. The company's $3.5 billion revolver is due in February 2015 and
contains a debt-to-capital covenant with a maximum of 67%. DuPont has
significant headroom under the covenant which it is expected to maintain.
Near-term maturities of $750 million for the remainder of 2013, $1.7 billion
due in 2014, $1.5 billion due in 2015, and $1.6 billion due in 2016 are
manageable in light of cash balances and market access.
A rating concern is the underfunding of the pension funds. The U.S. pension
plans with plan assets were underfunded by $6.6 billion at Dec. 31, 2012. The
company does not expect to make contributions for 2013 after making
contributions of roughly $500 million in 2010 and early 2012. However, Fitch
recognizes DuPont may make meaningful but likely manageable cash contributions
to its pension plans in the future. Recent increases in interest rates, if
maintained through the end of the year, could reduce the underfunded position.
Positive: Future developments that could lead to positive rating actions
--Total debt to EBITDA below 1.5x on a mid-cycle basis in combination with
annual FCF over $1.5 billion.
Negative: Future developments that could lead to negative rating actions
--Leveraging transactions: debt-financed share repurchases, dilutive
--Substantially diminished cash balances while gross leverage remains above
--Weak or negative FCF leading to incremental borrowings;
--Spinoffs or sales of assets without a commensurate reduction in debt.
Fitch affirms the following ratings:
--Long-term IDR at 'A';
--$3.5 billion unsecured bank revolver at 'A';
--Senior unsecured notes at 'A';
--Senior unsecured debentures at 'A';
term IDR at 'F1';
--Commercial Paper at 'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (August 2013);
--'Rating Chemical Companies' (August 2012);
--'Agriculture Suppliers Harvesting Ag Boom Benefits' (August 2013).
Applicable Criteria and Related Research:
Rating Chemical Companies
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Agriculture Suppliers Harvesting Ag Boom Benefits
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Christopher M. Collins, CFA
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Monica M. Bonar
Sean T. Sexton, CFA
Alyssa Castelli, +1-212-908-0540 (New York)
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