New York, April 29, 2022 -- Moody's Investors Service ("Moody's") upgraded the ratings of Eastman Chemical Company ("Eastman") - senior unsecured ratings to Baa2 from Baa3 and commercial paper rating to Prime-2 from Prime-3. The upgrade reflects that further paydown of debt in December 2021 along with significantly improved financial performance. The outlook has been changed to stable from positive.
"While 2021 was a good year for many chemical companies, Eastman also reduced debt by $300 million, which enabled it to improve credit metrics to levels that are supportive of a higher rating. We expect them to continue to generate credit metrics supportive of the Baa2 rating in 2022 despite some headwinds from a one-time event, and higher raw material and energy costs," stated John Rogers, Senior Vice President and lead analyst for Eastman.
Upgrades:
..Issuer: Eastman Chemical Company
.... Issuer Rating, Upgraded to Baa2 from Baa3
....Senior Unsecured Bank Credit Facility, Upgraded to Baa2 from Baa3
....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3
....Senior Unsecured Commercial Paper, Upgraded to P-2 from P-3
Outlook Actions:
..Issuer: Eastman Chemical Company
....Outlook, Changed To Stable From Positive
RATINGS RATIONALE
Eastman's Baa2 and Prime-2 ratings are supported by its size, product diversity, geographic diversity, vertical integration, specialty EBITDA margins in three of its four business segments, and solid free cash flow generation. Credit metrics bottomed out at the end of 2020 with Debt/EBITDA of 3.8x, Retained Cash Flow (RCF)/Debt of 16%, despite paying down more than $300 million of debt. In 2021, demand and selling prices improved substantially despite higher raw material and energy costs. At December 31, 2021, Moody's-adjusted credit metrics improved to 2.7x Debt/EBTIDA and Retained Cash Flow/Debt (RCF/Debt) of 24%. In the first quarter of 2022 metrics would have improved except for an unplanned outage at their Kingsport facility caused by a burst steam line. Demand continues to be very strong, but results are still being limited by rising raw material and energy costs that will continue into the second quarter. The company expects full year results to generate EBITDA growth in the high single digits, excluding divestitures, which should further improve credit metrics. Moody's adjustments add $122 million in pension liabilities, $207 million in capitalized operating leases and $239 million from its factoring programs.
Eastman's capex is expected to increase over the next couple of years due to investments it is making to expand capacity for its existing products and add polymer recycling capacity in France to further accelerate the growth of its Advanced Materials business and increase margins. Eastman is starting up a $250 million chemical recycling facility for polyester resins (including PET bottles, carpets and other polyester plastics) in Kingsport, TN later this year and has announced that it will build a similar methanolysis unit to depolymerize waste plastics and add polymer units to create a variety of first-quality recycled polymers for specialty, packaging, and textile applications. The total project cost for the new French facility is expected to be on line by 2025 and initially cost roughly $600-800 million. Prices for 100% recycled PET resins, especially for food and beverage applications, are priced at a substantial premium to virgin non-recycled resins due to growing demand and limited supply. In total, these two facilities will enable Eastman to produce 260 thousand metrics tons of recycled polymers.
Eastman is expanding capacity for several other products that are experiencing strong growth including tertiary amines and cellulosic yarn. These projects should improve Eastman's financial performance over the next several years; however, near term headwinds due to higher oil prices and energy costs will limit profit growth in 2022 as the company passes through these higher costs.
Eastman's liquidity is currently stressed by an unusually large amount of debt maturing over the next 18 months - a $750 million bond maturing in August of 2022 and an Euro 700 million bond maturing in May 2023. These maturities are sizable relative to the company's cash balance of $459 million at December 31, 2021, and full availability under its $1.5 billion revolving credit facility maturing 2026 that supports its commercial paper program. There were no borrowings or commercial paper outstanding as of 31 December 2021. The company also has roughly $300 million in committed factoring programs with roughly $239 million outstanding.
The stable outlook reflects the expectation that the company can demonstrate growth in earnings and cash flows in a rising cost environment and keep credit metrics at levels that will support the Baa2 rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's would likely consider an upgrade to Eastman's ratings if Moody's-adjusted leverage remains at or below 2.0x and Retained Cash Flow/Debt remains at or above 30% on a sustained basis. A downgrade would be considered if leverage rises above 3.0x on a sustained basis and its Retained Cash Flow/Debt remains below 20%.
ESG CONSIDERATIONS
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 business. Eastman is a diversified chemical company and has similar social risks to other large diversified chemical companies. Eastman has below average governance risk as it is a publicly traded company, with an independent board and has maintained financial policies consistent with an investment grade rating.
The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, 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 has revenues of $9 to $11 billion depending on commodity prices.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
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Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
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The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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John Rogers
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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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.
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JOURNALISTS: 1 212 553 0376
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