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Rating Action:

Moody's changes Eastman's outlook to negative, affirms Baa2 ratings

07 Oct 2019

New York, October 07, 2019 -- Moody's Investors Service ("Moody's") changed Eastman Chemical Company's (Eastman) outlook to negative from stable. At the same time, Moody's affirmed all of Eastman's senior unsecured ratings at Baa2 and its Prime-2 rating for commercial paper. These actions are a result of ongoing weakness in credit metrics over the past several years as the company has faced a difficult operating environment, which has prevented any meaningful improvement in earnings or cash flows despite a greater than anticipated reduction in balance sheet debt.

"Eastman's challenges will continue as industrial demand is likely to remain weak for the rest of 2019 and into 2020 along with a strong US dollar that remains a more modest headwind," said John Rogers, Senior Vice President and lead analyst for Eastman. "These conditions will likely keep leverage near or above 3.0x over the next 12-18 months despite further modest debt reduction.

Affirmations:

..Issuer: Eastman Chemical Company

.... Issuer Rating, Affirmed Baa2

....Senior Unsecured Shelf, Affirmed (P)Baa2

....Senior Unsecured Revolving Credit Facility, Affirmed Baa2

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

Outlook Actions:

..Issuer: Eastman Chemical Company

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Eastman's Baa2 issuer rating reflects its size, product diversity, geographic diversity, vertical integration, specialty EBITDA margins (>20% of sales) in three of its four business segments, and solid free cash flow generation. Weaker earnings in 2019 primarily due to headwinds in sales volumes in all four segments and a strong US Dollar, primarily from the global industrial slowdown, have offset the benefits of lower leverage versus 2Q2018.

As of June 30, 2019, Moody's-adjusted credit metrics were 3.2x Debt/EBTIDA and Retained Cash Flow/Debt (RCF/Debt) was 19.6%. Moody's adjustments add $268 million in pension liabilities and $202 in capitalized operating leases; these adjustments also boost EBITDA by $128 million. For several years, Eastman's adjusted leverage has been sustained over 3.0x Debt/EBITDA on a Moody's-Adjusted basis. Despite continued modest debt reduction, the company remains weakly placed in the rating category. Given the expectation for a further weakening in the global economic environment and ongoing industrial demand softness over the next 12-18 months, Moody's projects that Eastman will continue to generate leverage close to or above Moody's downgrade triggers. Moody's projections assume that Eastman will reduce debt by roughly $300 million versus year-end 2018 by the end of 2019. It also assumes that the company's pension adjustment will increase modestly at the end of 2019 due to a lower discount rate.

Following the acquisition of Taminco in December 2014, costing $3.5 billion and funded with $3.0 billion in new debt, Eastman became a vertically-integrated producer of predominantly specialty chemicals, specialty resins, plastics and fibers. While Eastman generates solid free cash flow, management continues to direct a significant portion of its free cash flow to share repurchases. The company completed $250 million in share buybacks in the first half of 2019 and $400 million in 2018, which attribute to constrained credit metrics. Moody's expects share repurchases to slow in the second half of 2019 in order to enable the $300 million in debt reduction in 2019.

Eastman's good liquidity reflects the company's cash balance of $186 million, full availability of its $1.5 billion revolving credit facility, a $1.1 billion commercial paper program with current borrowings of $373 million, and $250 million accounts receivable securitization facility with no outstanding borrowings at June 30, 2019. The nearest term debt maturity is the senior unsecured notes due January 2020.

The negative outlook reflects Moody's view that credit metrics will remain challenged over the next 12-18 months in part from a weaker economic environment. Moody's would likely consider a downgrade, if Eastman is unable to reduce leverage below 3.0x on an Moody's-adjusted basis and raise RCF/Debt sustainably above 20%. The return to a stable outlook would necessitate that the company lowers leverage below 3.0x and is on track to grow earnings and cash flow so that credit metrics can be reasonably expected to fully support the rating with leverage closer to 2.5x and RCF/Debt closer to 25%. An upgrade is unlikely at this time, but would be warranted, if Moody's-adjusted leverage is sustained below 2.0x and RCF/Debt is greater than 30%.

Environmental, social, and governance factors are important considerations in Eastman's credit quality. The company is exposed to environmental and social risks typical for a large diversified chemical company, such as significant accruals for environmental remediation and social concerns due to the size and number of production facilities. Eastman spends roughly $40-45 million per year on environmental remediation, which is not a credit negative. Accrued environmental liabilities are currently about $300 million, but could increase up to $500 million depending on future requirements by regulators. However, this will not hurt its credit profile given the long tail nature of these liabilities. A significant portion of Eastman's environmental liabilities are from an acquired businesses.

The principal methodology used in these ratings was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Eastman Chemical Company (Eastman) is a vertically integrated producer of both commodity and specialty chemicals, specialty resins and plastics and fibers. Eastman had revenues of over $9.6 billion for the last twelve months ended June 30, 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

John Rogers
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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