Fitch Affirms Methanex's IDR at 'BBB-'; Outlook Stable
CHICAGO -- December 5, 2013
Fitch Ratings has affirmed Methanex Corporation's (Methanex) long-term Issuer
Default Rating (IDR), revolving credit facility and senior unsecured notes
ratings at 'BBB-'. The Rating Outlook is Stable.
KEY RATING DRIVERS
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 margins 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 less than 20% of
the company's nameplate capacity will be in Chile, versus a level as high as
56% in 2009.
Methanex's Chilean plants have been underutilized for a number of years due to
the disruption of 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 two plants capable of producing one million tonnes per year each,
relocating them to Geismar and reassembling them. While the relocation will
save the company substantially in comparison to greenfield plants, Methanex
expects to spend approximately roughly $1 billion relocating both plants.
The company's credit statistics have improved in 2013 as methanol prices have
increased year over year. As calculated by Fitch, Methanex's debt/EBITDA
decreased from 2.7x in 2012 to 1.9x at Sept. 30, 2013. For the latest 12
months (LTM) ending Sept. 30, 2013, Fitch-calculated EBITDA/gross interest was
10.3x and funds from operations interest coverage was 9.2x, versus 6.8x and
7.6x in 2012. Free cash flow (FCF) has been neutral with $8 million in the LTM
period ended Sept. 30, 2013. While cash from operations has been strong,
capital expenditures have increased substantially with the plant relocations,
the restart at Waitara Valley and debottenecking at Montunui and Medicine Hat.
Fitch expects negative FCF in 2014 as the bulk of capital spending occurs for
the plant relocations with a return to positive FCF in 2015 as Geismar begins
producing methanol at the end of 2014. Methanex estimated at Sept. 30, 2013
that it will spend a further $780 million for the Geismar relocations.
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, New Zealand and United States
Methanex has a substantial liquidity position totaling $1.1 billion with $686
million in cash and an undrawn $400 million revolver which expires December
2016. The company has a light maturity schedule with only amortizations of its
limited recourse project financing its $150 million 6% notes mature on Aug.
15, 2015. Financial covenants contained in the company's debt structure
include a debt-to-capitalization ratio and minimum interest coverage ratio
(revolver). The company also has a limitation on secured debt (contained in
the revolver and notes outstanding).
The company's cash position will be further helped by a cash infusion from its
sell down of its stake in EMethanex. Methanex will retain its controlling
position with a slightly greater than 50% stake while realizing $110 million
in cash proceeds. Fitch views this sale as credit positive with Methanex able
to reduce exposure to Egypt and gain cash cushion for its large capital
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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (August 2013);
--'Rating Chemical Companies' (August 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Rating Chemical Companies
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Christopher M. Collins, CFA, +1-312-368-3196
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Mark C. Sadeghian, CFA, +1-312-368-2090
Sean T. Sexton, CFA, +1-312-368-3130
Brian Bertsch, +1-212-908-0549
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