Fitch affirms Eastman's IDR, senior unsecured rating at BBB; revises outlook to negative following company's announcement of Solutia acquisition

Alison Gallant

CHICAGO , January 27, 2012 (press release) – Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) and senior unsecured rating of Eastman Chemical Company (NYSE: EMN) at 'BBB' as well as the company's short-term IDR and CP rating at 'F2'. However, Fitch has revised Eastman's Rating Outlook to Negative from Positive following the company's announced acquisition of Solutia, Inc (NYSE: SOA). A detailed ratings list follows at the end of this press release.

THE TRANSACTION:

Under proposed terms of the deal, Eastman will acquire St. Louis-based specialty chemicals and materials company Solutia, Inc. for approximately $4.7 billion in enterprise value, including the acquisition of Solutia's $1.34 billion in debt outstanding. No major antitrust issues are expected to arise from the deal, and closing is anticipated in mid-2012. The main driver for the Negative Outlook is the debt-heavy financing that will be used to fund the deal. As proposed, Eastman will issue approximately $3.5 billion in acquisition debt (75% of the transaction total), along with equity and excess cash, which will more than triple Eastman's gross debt from $1.6 billion at Sept. 30, 2011 to $5.1 billion. On a pro forma basis immediately following the transaction, debt/EBITDA will increase to approximately 2.8 times (x) versus the 1.2x on a stand-alone basis at Sept. 30, 2011, pushing Eastman's credit metrics from levels that were strong for the 'BBB' category to levels that are weak for the category. Transaction debt is expected to consist of a five-year term loan and combination of five-, 10- and 30-year maturities.

RATINGS RATIONALE:

Eastman's stand-alone ratings are supported by the company's portfolio of differentiated chemical products, solid pricing power in key end user markets, good vertical integration of production streams along the acetyl, polyester and olefin value chain, economies of scale at its focused production sites, particularly at its main Kingsport, Tennessee location, and access to low cost light feedstocks in North America, which has improved the company's global cost competitiveness, particularly when compared to heavy-oil-derivative linked chemical production in Europe. Eastman's ratings are also supported by the company's ongoing portfolio high-grading, with shedding of lower margin and commoditized businesses and expansions into higher margin businesses such as filter tow markets in Asia, specialty plasticizers, and Tritan co-polyester. Ratings are balanced by the company's size; cash outflows for expected pension contributions; volatility in raw materials and energy costs; periodically high working capital requirements; an uncertain macroeconomic environment; and the integration risk and higher leverage stemming from the proposed acquisition.

RECENT FINANCIAL PERFORMANCE:

Eastman's recent stand-alone performance has been strong. As calculated by Fitch, LTM operating EBITDA at Sept. 30, 2011 rose to $1.29 billion, with EBITDA margins of approximately 20.6%, versus a recessionary low of $791 million in EBITDA and 15.7% margins in 2009. Debt/EBITDA at Sept. 30, 2011 was just 1.2x, while EBITDA/gross interest coverage was a robust 13.4x. For full year 2011, the company's operating earnings rose to $1.02 billion from the $862 million seen in 2010, with all segments showing y-o-y increases, led by Performance Chemicals and Intermediates (+28.1%), Specialty Plastics (+12.9%), CASPI (+10.7%) and Fibers (+6.1%). Looking forward, Fitch anticipates the combined company will be significantly free cash flow positive in 2012 and 2013.

LIQUIDITY:

Eastman's liquidity remained robust at $1.73 billion at Dec. 31, 2011, consisting of $777 million in cash and marketable securities, full availability on its $750 million in revolver capacity, and full availability on its $200 million accounts receivable securitization facility. Eastman's revolver is governed by a debt-to-EBITDA covenant maximum of 3.5x. Fitch expects Eastman to maintain comfortable headroom under the covenant over the remaining lifetime of the facility. Near-term debt maturities are manageable.

CATALYSTS FOR RATINGS ACTION:

Catalysts for removal of the Negative Outlook would include progress in bringing debt/EBITDA metrics back into the 2.0-2.5x level over the next 12-24 months, while maintaining positive FCF. Catalysts for a downgrade would include failure to make progress de-levering over the next 12-24 months due to a major operational problem; a global downturn which pushed EBITDA lower on a sustained basis; or a change in philosophy on use of the balance sheet.

Fitch affirms the following ratings on Eastman:

--Long-term IDR at 'BBB';

--Senior unsecured bank credit facility at 'BBB';

--Senior unsecured notes and debentures at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

The Rating Outlook is revised to Negative from Positive.

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:

--'2012 Outlook: North American Chemicals Industry (Dec. 22, 2011);

--'Corporate Rating Methodology (Aug. 12, 2011);

--'Liquids Rich Shale Boom -- A Tailwind for North American Chemicals' (April 18, 2011);

--'Rating Chemicals Companies' (May 13, 2010).

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