Fitch Rates Eastman Chemical's $1B Term Loan 'BBB'

Fitch Ratings has assigned a rating of 'BBB' to Eastman Chemical's (Eastman) $1 billion senior unsecured term loan A due 2019. See full list of Eastman's ratings at the end of this release. The Rating Outlook is Stable.

The term loan will be used to help finance the $3 billion acquisition of Taminco Corporation when it closes later this year or early next. Fitch affirmed Eastman's ratings on September 11 following its announcement that it had reached an agreement to purchase Taminco.

KEY RATING DRIVERS

Eastman's ratings are based upon expectations of pro forma debt/EBITDA declining and strong free cash flow (FCF) after capital expenditures and dividends post-closing of the transaction. Pro forma debt/EBITDA is expected to rise to approximately 3x immediately after the acquisition closes and should be trending down in 2015 and 2016 from debt repayment from FCF generation. FCF after capital spending and dividends is expected to be approximately $1.5 billion over the next two years.

The ratings reflect Eastman's diversity of chemical products, strong market positions in key end-user markets, vertical integration of production along its acetyl, polyester and olefin product chains, access to low-cost North American feedstocks and consistent operating results coupled with relatively conservative financial strategy.

THE ACQUISITION

Taminco is a global specialty chemical company producing alkylamines for various end-market uses including Agriculture (crop protection), Personal & Home Care, Water Treatment, Animal Nutrition, and Energy. The acquisition is for approximately $3 billion inclusive of assumed debt. As a result of the transaction, Eastman's balance sheet debt is expected to increase to approximately $7.8 billion from nearly $4.8 billion as of June 30, 2014. Taminco's LTM EBITDA ending June 30, 2014 was approximately $250 million while Eastman's LTM EBITDA was approximately $2.3 billion for the same period.

The acquisition was approved by the Boards of Directors for both companies and Taminco's majority stockholder has agreed, subject to certain conditions, to vote its shares of Taminco's common stock in favor of the transaction, which is expected to close by the end of 2014.

FCF and EXPECTATIONS

Eastman's debt/EBITDA was 2.1x as of June 30, 2014, and it is Fitch's expectation that debt/EBITDA for Eastman will decrease to 2x-2.5x by the end of 2016 primarily driven by debt reduction from FCF. As stated above, FCF after capital expenditures and dividends is expected to be approximately $1.5 billion over the course of 2015 and 2016. In comparison, Eastman's standalone FCF in 2012 and 2013 was a combined $1.14 billion after capital expenditures and dividends.

LIQUIDITY

Liquidity is provided by an upsized and undrawn $1.25 billion unsecured credit facility (due October 2019) and a $250 million A/R securitization facility also undrawn as of June 30, 2014. The credit facility backstops Eastman's commercial paper program. The main financial covenant of the revolver is a debt/EBITDA limit of 4x stepping down to 3.75x on Dec. 31, 2015 and 3.5x on Dec. 31, 2016 and thereafter. Near- to intermediate-term maturities are $250 million due in December 2015, $1 billion due June 2017 and $160 million due November 2018.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

--Total debt/EBITDA of 1.5x on a mid-cycle basis in combination with maintenance of annual FCF over $500 million.

Negative: Future developments that could lead to negative rating actions include:

--Debt/EBITDA above 2.5x on a sustained basis;

--Sustained negative FCF leading to incremental borrowings;

--Leveraging events: debt-financed share repurchases, additional leveraged acquisitions, etc.;

--A major operational issue or global recession which pushes EBITDA lower on a sustained basis and is not offset by adjustments in Eastman's cost structure.

Fitch assigns the following rating:

--Term Loan A 'BBB'.

Fitch rates Eastman as follows:

--Long-term Issuer Default Rating (IDR) 'BBB';

--Senior unsecured revolving credit facility 'BBB';

--Senior unsecured notes/debentures 'BBB';

--Short-term IDR 'F2';

--Commercial Paper 'F2'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Rating Chemical Companies' (August 2012).

Applicable Criteria and Related Research:

Rating Chemical Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682313

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=902674

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