Fitch Affirms Methanex Corp. at 'BBB-'; Outlook Stable
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 for Methanex is
Stable.
KEY RATING DRIVERS
The rating recommendation reflects Methanex's position as the largest
global supplier of methanol, global distribution network, relatively low
cost production, and moderately levered balance sheet. Rating
limitations include the company's single product focus, output
constraints facing multiple facilities, structural headwinds from
increased Chinese production, U.S. capacity increases and medium to
long-term effects of low global crude prices.
The company's credit statistics have weakened in the past year, driven
largely by methanol prices moving sharply lower in sympathy with lower
crude prices. For the LTM ending Sept. 30, 2015, Fitch-calculated
Methanex total adjusted debt/EBITDAR (excluding limited recourse debt)
has increased to 3.9x from 2.7x at year end 2014, but is expected to
decline to under 3.5x by 2017. FCF has declined to negative -$145
million for the LTM period, from approximately $20 million at YE 2014,
given the combination of declining FFO and elevated capex associated
with the $1.4 billion relocation and construction of the two Geismar
facilities, but is expected to be positive starting in 2016. A full year
of accrued earnings for both Geismar facilities combined with lower raw
materials prices flowing through will be a positive, but will likely be
at least partially offset by top line pricing pressure associated with
lower global methanol prices in the near to medium term.
Fitch Ratings expects a recovery from currently depressed methanol
prices to be muted in the near term due to the agency's expectations for
continued low crude oil prices, and oversupply in global coal markets to
continue to lower the cost of coal-to-methanol production, which is
traditionally the highest marginal cost production globally. Fitch
expects a methanol price recovery to be primarily driven by gradually
rising energy prices, as well as growth in methanol used for energy
applications, such as fuel blending, and methanol-to-olefins (MTO)
processes.
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. Supply contracts with this structure
include the New Zealand, Trinidad, Geismar 1, Egypt and Chile methanol
facilities (over 90% of estimated 2015 Methanex production). Cost
savings, however, can lag about a quarter due to the company's
accounting treatment of costs. 40% of the gas supply for Geismar 2 has
been hedged.
LIQUIDITY AND FCF
Methanex has $827 million in liquidity, including $427 million cash on
hand and an undrawn $400 million credit facility. The cash balance
includes $55 million related to the 50% non-controlling interest in
Egypt. For the LTM period ended Sept. 30, 2015, the company produced
$470 million in cash from operations. Fitch expects Methanex will be
free cash flow negative in 2015 due to capex associated with the
completion of Geismar 2, but Fitch expects the company will be free cash
flow positive once both Geismar plants come online. The company
estimates it has $110 million left to spend on Geismar as of Sept. 30,
2015.
MEOH's notable covenants, including cross-default provisions, apply to
MEOH and its subsidiaries, and exclude the limited recourse subsidiaries
(the Egypt entity). The limited recourse debt of the Egypt entity is
secured only by assets of the Egypt entity, and lenders of those
facilities have no recourse to MEOH or its other subsidiaries.
At Sept. 30, 2015, management believes MEOH was in compliance with all
covenants and Fitch expects MEOH to continue to have sufficient headroom
in its interest coverage and debt to capitalization ratio covenants.
Fitch notes that MEOH has a significant amount of minimum operating
lease payments that contribute to its calculation of total adjusted debt
which primarily relate to vessel charters and terminal facilities. The
minimum payments as of December 31, 2014 are $146 million in 2015, $132
million in 2016, $139 million in 2017, $134 million in 2018, $121
million in 2019, and $859 million thereafter.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Methanex include:
--Methanol price at current levels for ratings time line;
--No delays with Geismar 2 plant start, both facilities at management's
production guidance thereafter;
--Capex at ongoing maintenance after finishing Geismar 2;
--Dividends continue, share repurchases continue with excess cash.
RATING SENSITIVITIES
Positive: Future developments that could, in combination, lead to
positive rating actions include:
--Increased product diversification;
--Adjusted debt to EBITDAR (not including limited recourse debt) of
below 1.5x on a sustained basis.
Negative: Future developments that could lead to negative rating actions
include:
--Sustained period of methanol overcapacity depressing pricing and
margins;
--Adjusted debt to EBITDAR (not including limited recourse debt) above
3.5x on a sustained basis;
--Large share repurchases or special dividends financed by debt.
--Additional significant disruption in operations of major operating
sites.
FULL LIST OF RATING ACTIONS
Fitch affirms the ratings for Methanex as follows:
--Long-term IDR at 'BBB-';
--Senior unsecured credit facility at 'BBB-';
--Senior unsecured notes at 'BBB-';
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993420
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993420
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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