Fitch Ratings has assigned a rating of 'BBB-' to Albemarle Corporation's
(NYSE: ALB, Albemarle) new $300 million 364-day senior unsecured term
loan and new $950 million five-year term loan. Proceeds of the term
loans are to be used to finance the redemption of Rockwood Specialties
Group, Inc.'s $1.25 billion, 4.625% senior notes due 2020. The term
loans have substantially the same covenants as the revolving credit
facility. A complete list of ratings follows at the end of this release.
Albemarle's ratings reflect the company's leading market position in
bromine, lithium, refining catalysts, and surface treatment chemicals
which generate high margins and strong cash flow. The ratings also
reflect high initial leverage following the January 2015 acquisition of
Rockwood Holdings, Inc. and Fitch's expectation that asset sales and
free cash flow (FCF) will be applied to debt reduction, lowering
leverage below 3x by the end of 2018.
KEY RATING DRIVERS
The markets for bromine and lithium are highly concentrated and
Albemarle is a key player benefiting from low-cost production and
pricing power. The company is the second largest bromine producer after
Israel Chemicals Ltd. and the second largest lithium producer after
Sociedad Quimica y Minera de Chile S.A. (SQM). As filed in the SEC form
8K dated April 13, 2015, adjusted EBITDA was $225 million with a 28%
margin and $180 million with a 38% margin for bromine and lithium,
respectively, in 2014.
FAVORABLE GROWTH TRENDS
Growth in catalysts should benefit longer-term from rising fuel
consumption and more stringent air quality mandates. Fluid catalytic
cracking (FCC) catalysts are associated with heavy oil upgrading and
demand should benefit over time from the trend toward heavier fuel.
Growth in lithium should benefit from growth in fuel storage
applications including for consumer electronics, electric vehicles and
grid storage. Bromine is expected to benefit from use in mercury control
at power generators longer term. Surface treatment products should grow
with aerospace and automotive production.
LARGE COMPETITORS IN CATALYSTS
While the company has strong niche positions in refining catalysts and
polymer catalysts, competitors include Shell, Chevron, and BASF.
EXPOSURE TO HYDROCARBON DRILLING
Demand for bromine for drilling completion fluids slowed in the fourth
quarter of 2014 and first half of 2015 as a result of lower offshore
drilling activity driven by the sharp decline in oil prices. Beyond
2015, this activity should stabilize and resume solid growth.
Fitch expects adjusted EBITDA of about $900 million for 2015 reducing in
2016 to the degree that assets are sold. Fitch expects annual FCF beyond
2015 to be on the order of $400 million. Fitch expects management to
repay debt with FCF generation but believes leverage could remain above
target until 2018.
--Asset sales of businesses with aggregate 2014 adjusted EBITDA of $100
million are sold for an average multiple of 4.5x in 2016;
--Aggregate sales growth of 3% per annum generally on a pro forma
--Pre-synergy margins consistent with historical pro forma combined
--Anticipated synergies at 100% and 85% of management's expectations in
2015 and 2016, respectively;
--Excess cash flow applied to debt reduction.
Positive: Future developments that may, individually or collectively,
lead to positive rating action are not expected over the next 18 months
--Total debt-to-operating EBITDA sustainably below 2x.
Negative: Future developments that may, individually or collectively,
lead to negative rating action include:
--Failure to make substantial progress toward de-levering over the next
--Expectations of total debt/EBITDA above 4x at the end of 2016;
--Failure to generate positive FCF in 2015 and expectations that it
would be below $400 million in 2016 without some combination of
additional asset sales or equity raising.
LIQUIDITY AND DEBT STRUCTURE
On Jan. 12, 2015, Albemarle completed the acquisition of Rockwood
Holdings, Inc. for a purchase price of approximately $5.7 billion
comprising approximately $3.6 billion in cash and approximately $2
billion in equity. Albemarle assumed the $1.25 billion notes issued by
Rockwood Specialties Group, Inc. Albemarle guarantees the notes and
Rockwood Specialties and Rockwood Holdings guarantee Albemarle notes and
credit facilities. On Sept. 14, 2015, Albemarle announced its intention
to redeem the notes with proceeds of the new term loans.
At June 30, 2015, total debt was $4 billion compared to pro forma
adjusted LTM EBITDA of $958 million at 4.2x. At June 30, 2015, $50.8
million of the debt was at non-guarantor subsidiaries. Albemarle is in
the market to sell non-core assets with aggregate EBITDA of $100 million
and proceeds earmarked to reduce debt. The company expects net
debt/adjusted EBITDA of around 4x at the end of 2015 and targets 2.5x
between the third quarter of 2017 and the end of 2018. The company has
suspended its share repurchase program until leverage reaches that level.
Of the $207.2 million in cash on the balance sheet at June 30, 2015,
$201 million was held by foreign subsidiaries. Pro forma for the
redemption of the notes and issuance of the term loans, cash was $164
million at June 30, 2015. Deferred tax liabilities of $102.6 million
relate to the expected future repatriation of prior-period earnings of
Rockwood that are planned to be repatriated in 2015. The company has a
$1 billion revolving credit facility to support its commercial paper
(CP) program and for general corporate purposes. The facility expires in
February 2019 and availability is reduced by outstanding CP ($418
million as of June 30, 2015 classified as current portion of long-term
debt). The leverage covenant is 4.50x for 2015 and then steps down by
0.25 each quarter in 2016 until reaching 3.50x. Availability under the
revolver and CP program was $582 million at June 30, 2015.
Fitch expects the company to be modestly FCF positive in 2015 after
capital expenditures of $230 million and common dividends of $119
million. Albemarle guides to annual capital expenditures of 4%-6% of
revenues plus spending for the lithium hydroxide plant. Capital
expenditures for 2015 are expected to be slightly over 6%.
Pro Forma for the redemption of the notes and issuance of the term
loans, Fitch estimates annual maturities of debt over the next five
years to be $428 million in 2015 (CP of $418 million), $316 million in
2016, $63 million 2017, $98 million in 2018, and $353 million in 2019.
FULL LIST OF RATING ACTIONS
Fitch currently rates Albemarle as follows:
--Long-term Issuer Default Rating (IDR) 'BBB-';
--Short-term IDR 'F3';
--Senior unsecured credit facilities 'BBB-';
--Senior unsecured notes 'BBB-'.
Rockwood Specialties Group, Inc.
--Senior unsecured notes 'BBB-'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: May 28, 2015.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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