April 5, 2012 / 7:07 PM / 5 years ago

TEXT-S&P revises Celanese Holdings outlook to positive

Overview	
     -- U.S. chemical producer Celanese US Holdings LLC has demonstrated good 	
operating performance and stronger-than-expected credit metrics.	
     -- We are revising our outlook on Celanese to positive from stable. At 	
the same time, we are affirming our ratings, including the 'BB' corporate 	
credit, on the company.	
     -- The positive outlook reflects our opinion that, if operating 	
performance remains strong and management continues to pursue a disciplined 	
financial policy, we could raise the ratings by the end of 2012.	
	
Rating Action	
On April 5, 2012, Standard & Poor's Ratings Services revised its outlook on 	
Dallas-based Celanese US Holdings LLC to positive from stable. We also 	
affirmed all of our ratings, including the 'BB' corporate credit rating, on 	
the company. We are maintaining our '1' recovery rating for the senior secured 	
debt obligations, indicating our expectation of a very high (90% to 100%) 	
recovery in the event of payment default. Also, we are maintaining our '5' 	
recovery rating for both tranches of the unsecured notes, indicating our 	
expectation of a modest (10% to 30%) recovery in the event of payment default.	
	
Rationale	
The outlook revision reflects the good operating performance at Celanese and 	
the possibility that, if it continues to maintain moderate financial policies, 	
we could raise our ratings on the company by the end of 2012. Earnings growth 	
and debt reduction have supported improved credit measures with funds from 	
operations (FFO) to total debt at 27% as of Dec. 31, 2011. Accordingly, we 	
have revised our financial risk profile assessment of the firm to 	
"significant" from "aggressive".	
	
The ratings on Celanese, a subsidiary of Celanese Corp., reflect our 	
assessment of the company's business risk profile as "satisfactory" partially 	
offset by a financial risk profile we view as "significant". The company is a 	
leading global producer of diverse commodity and manufacturing chemicals in a 	
cyclical and highly competitive industry. However, the relative stability of 	
operating profits reflects the strength of Celanese's competitive positions. 	
Solid internal funds generation enhances the company's flexibility to make 	
bolt-on acquisitions and capital investments to achieve growth.	
	
With annual revenues of about $6.7 billion, Celanese ranks as No. 1 or 2 by 	
global sales for many of its products. It has broad product diversity, 	
balanced end-market positions, and an earnings base distributed across North 	
America, Europe, and Asia. Still, its results remain subject to general 	
economic activity, as well as the cyclicality of certain industries it serves, 	
particularly automotive, electrical, and construction. Celanese also generates 	
a significant portion of its consolidated earnings from its acetyls 	
intermediates business, which consists primarily of products with 	
commodity-like characteristics. However, the company's market share and 	
expansion into downstream products lessens cyclicality compared with producers 	
of other commodity chemicals with more fragmented competition.	
	
Operating performance improved in 2011 over the corresponding period in 2010, 	
supported by price increases to recover higher raw material 	
costs--particularly in the acetyl intermediates, consumer specialties, and 	
industrial specialties segments. Overall sales volumes declined 1% in 2011 	
from 2010, with volume growth in the advanced engineered materials and 	
industrial specialties segments offset by volume declines in other segments. 	
Consolidated EBITDA margins are currently about 16%, and the company has taken 	
restructuring actions including closing certain production facilities and 	
reducing its overall fixed-cost structure.	
	
Celanese's acetyls intermediates unit is the No. 1 global producer of acetic 	
acid and vinyl acetate monomer (VAM). The top two players in the acetic acid 	
industry have more than 50% of the market, and demand growth is generally GDP 	
plus 1% to 2%. The VAM product category is similarly attractive--the top four 	
players control more than 50% of the market, and demand growth is slightly 	
above GDP. Celanese's technology provides it with a good cost advantage 	
(creating a barrier to competitive entry). Further advancing this competitive 	
advantage is the company's investment in its state-of-the-art facility in 	
Nanjing, China, which began operating in 2007, expanding its already extensive 	
presence in the higher-growth Asia region.	
	
Celanese also has a leading position in the production of acetate tow for 	
cigarette filter applications--a steadily profitable business that has become 	
a source of dividends from its ventures in China. The high-operating-margin 	
advanced engineered materials segment supplies technical polymers (niche 	
specialty plastics) used in a wide range of applications in the automotive and 	
electronic sectors, as well as other consumer and industrial goods.	
	
Improved earnings and debt reduction have supported better credit measures, 	
with FFO to total debt at about 27% as of Dec. 31, 2011, versus 18.5% a year 	
earlier. Our debt calculations capitalize operating leases and include 	
unfunded pension and postretirement benefit obligations. We view an FFO to 	
total debt ratio of 20% on average as appropriate for the ratings. The excess 	
cash on Celanese's balance sheet should provide cushion for acquisitions and 	
growth-related investments.	
	
In March 2012, Celanese received key government approvals necessary to proceed 	
with its previously announced plans to modify and enhance its existing 	
integrated acetyl facility in China to produce ethanol for industrial uses. 	
The company expects the unit, based on the Celanese TCX(r) ethanol process 	
technology to begin production in mid-2013. Celanese also plans to construct 	
one or possibly two greenfield ethanol units in China for the production of 	
ethanol for industrial uses, and expects its initial investment to be $300 	
million per unit (to be spread over three years) with capacity of 400,000 tons 	
per year per unit. As part of its longer-term strategy, Celanese is also 	
exploring opportunities to utilize the technology to produce liquid fuel for 	
transportation.	
	
Liquidity	
We deem the company's liquidity to be "strong" based on its ample liquidity 	
via its substantial cash balances, solid free cash generation, and 	
availability under its revolving credit facility. As of year-end 2011, 	
Celanese had $682 million in cash, full availability under its $600 million 	
revolving credit facility due 2015, and $154 million in availability under the 	
$228 million credit-linked revolving credit facility.	
	
Other relevant aspects of our assessment of the company's liquidity profile 	
include:	
     -- We believe that sources of liquidity over the next year will exceed 	
its uses by 1.5x or more;	
     -- Net sources and covenant cushions should be positive even with a 30% 	
drop in EBITDA or a 25% increase in debt; and	
     -- The company benefits from strong access to capital markets and it 	
could likely absorb low-probability shocks, based on positive cash flows from 	
operations and available liquidity.	
	
We expect capital expenditures to be around $350 million to $400 million in 	
2012, and capital spending on its ethanol capacity will be spread out over the 	
next several years. We believe Celanese likely will use its free cash for 	
bolt-on acquisitions, organic growth and expansion opportunities, debt 	
reduction, and limited share repurchases.	
	
Debt maturities are manageable, with limited maturities until 2015 when the 	
revolving credit facility expires. The first-lien senior secured facility 	
covenant requires the company's first-lien senior secured leverage ratio to be 	
less than 3.9x when any amount is outstanding under the revolving credit 	
facility. We expect the company to maintain reasonable cushion with respect to 	
covenant compliance under the credit agreement.	
	
We expect Celanese to contribute about $100 million to $125 million (in excess 	
of the pension expense) to its defined benefit pension plans in 2012. Its 	
unfunded pension obligations are significant at $1.2 billion as of Dec. 31, 	
2011. The company's other postretirement benefit obligations were unfunded at 	
$281 million as of year-end 2011.	
	
Recovery analysis	
For the detailed recovery analysis, see our recovery report on Celanese, to be 	
published shortly on RatingsDirect.	
	
Outlook	
The positive outlook reflects the company's above-par credit metrics, and our 	
expectation of continued earnings growth over the next couple of years. Given 	
its ongoing product innovation, geographic diversity, and efforts to boost 	
productivity, we believe that Celanese can maintain its strong internal cash 	
generation. We do not expect the company to make significant share repurchases 	
or large acquisitions. We could raise the long-term ratings by one notch 	
during the next several quarters if earnings and cash flow continue to 	
increase, so that Celanese can preserve an FFO to total debt of 25% to 30% on 	
a sustained basis. This could happen if the firm maintains debt near current 	
levels while achieving annual top-line growth of 5% to 10% and operating 	
profit margins at their current 16%.	
	
On the other hand, we could revise the outlook to stable if FFO to total debt 	
declines to less than 20% as a result of weaker end-market demand, 	
greater-than-expected shareholder-friendly activity, or any large 	
debt-financed acquisitions.	
	
Related Criteria And Research	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- Key Credit Factors: Business And Financial Risks In The Commodity And 	
Specialty Chemical Industry, Nov. 20, 2008	
	
Ratings List	
Ratings Affirmed; Outlook Action	
                                        To                 From	
Celanese US Holdings LLC	
CNA Holdings Inc.	
 Corporate Credit Rating                BB/Positive/--     BB/Stable/--	
	
Ratings Affirmed	
	
Celanese US Holdings LLC	
 Senior Secured                         BBB-	
  Recovery Rating                       1	
 Senior Unsecured                       BB-	
  Recovery Rating                       5	
	
Celanese Americas LLC	
 Senior Secured                         BBB-	
  Recovery Rating                       1

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