Fitch Affirms Dow's IDRs at 'BBB/F2'; Outlook Stable

Fitch Ratings has affirmed Dow Chemical Company's (NYSE: DOW) long-term Issuer Default Rating (IDR) at 'BBB'. Approximately $23.5 billion in debt and commitments are affected by this rating action. A complete list of rating actions is provided at the end of this release.

The Rating Outlook is Stable.

KEY RATING DRIVERS

INVESTMENT-GRADE BUSINESS PROFILE

The ratings reflect DOW's position as the largest North American chemical company, patent-advantaged products representing more than 20% of revenues, and leading market positions in many commodity and specialty chemicals segments. The company has highly integrated production streams resulting in significant economies of scale and scope.

SENSITIVITY TO HYDROCARBONS

Hydrocarbon feedstocks and energy comprise roughly 38% of DOW production costs and operating expenses. These costs generally follow price trends in oil and increases and decreases in oil prices are generally reflected in selling prices of petroleum chemicals and plastics. In particular, Fitch estimates price declines of 10% attributable to changes in crude oil in first quarter 2015 compared to the first quarter of 2014.

PLASTICS PROVIDES PROFITS

Over 47% of 2014 EBITDA, excluding certain items, was attributed to its Performance Plastics segment. Dow is the largest ethylene and second largest polyethylene producer in the world. Roughly 70% of its cracker capacity is located in the cost-advantaged Americas and Middle East. Fitch expects this segment to continue to produce a significant share of DOW's profits given investments in the U.S. Gulf Coast and at the company's 35% owned Sadara Chemical Company (Sadara).

SIGNIFICANT CAPITAL SPENDING COMMITMENTS

DOW is expanding its U.S. Gulf Coast ethylene and propylene capacity in order to take advantage of low feedstock costs. These expansions have increased annual capital expenditures above $3.5 billion but this is expected to decline to below $3 billion once the projects complete. Fitch views the economics of these projects favourably given the domestic and export markets for Dow's downstream products and competitive advantages from low feedstock costs.

OLIN REVERSE MORRIS TRUST TRANSACTION

In March 2015, DOW and Olin Corporation (Olin) announced agreements to merge DOW's chlorine products business with Olin to create a new company (NewCo) with 2014 pro forma revenues of $7 billion and EBITDA of $1 billion. NewCo will make a cash payment and issue debt to be exchanged for DOW's debt in an aggregate amount of $2 billion and issue DOW NewCo stock currently valued at $2.2 billion. Fitch expects DOW to effect a split-off of the NewCo by offering to exchange its NewCo shares for DOW shares. In addition, DOW and Olin signed a 20-year ethylene supply agreement that will allow Olin to receive ethylene at integrated producer economics from DOW in exchange for an up-front cash payment of about $400 million.

MODEST LEVERAGE

As of March 31, 2015, total debt at $19.8 billion compared at 2.4x LTM operating EBITDA of $8.4 billion and FFO adjusted leverage was 3.4x. DOW has been rationalizing its portfolio of businesses to drive higher margins and cash flow as well as provide returns to shareholders. Excess cash flow and asset sales proceeds are earmarked for share repurchases. Fitch expects debt levels to remain at about current levels absent recapitalizing events.

CONVERSION OF PREFERRED SHARES

DOW's preferred stock Series A has dividends aggregating $340 million, annually compared to the common stock equivalent dividend of $163 million, annually. DOW may convert the issue into common stock at the applicable conversion rate if the common stock price exceeds $53.72/shr. for any 20 trading days in a consecutive 30 day window. Fitch expects DOW to convert the preferred shares as soon as possible.

STRONG LIQUIDITY

As of March 31, 2015, cash on hand was $6.3 billion including $4.8 billion held at subsidiaries in foreign countries. The company's $5 billion revolver maturing March 2020 was fully available and a further $1 billion of short-term committed facilities was available. The revolver has a debt to capital covenant maximum of 65% which compares to the calculation of 44% at March 31, 2015. Total liquidity of $12.3 billion compares to Fitch's expectation that DOW will generate free cash flow after 2015 capital expenditures guided to $3.9 billion, annual interest expense estimated at $1 billion, and annual dividends estimated at $1.9 billion. Current maturities of debt over the next five years are $380 million for 2015, $1.4 billion for 2016, $773 million for 2017, $935 million in 2018, $2.6 billion in 2019 and $2.1 billion in 2020.

EXPECTATIONS

Fitch expects 2015 EBITDA of at least $8.9 billion and at least $900 million free cash flow after dividends and capital expenditures. Fitch expects healthy free cash flow in 2016 despite the Reverse Morris Trust split-off of DOW businesses that had pro forma EBITDA of about $640 million in 2014. Free Cash flow is expected to grow with the completion of the propylene production facility in 2015, the Sadara project in 2016 and the Freeport ethylene project and other U.S. Gulf Coast production facilities in 2017.

KEY ASSUMPTIONS

--Reverse Morris Trust split-off occurs in the fourth quarter of 2015 as outline in announced in March 2015;

--Capital expenditures at guidance ($3.9 billion) for 2015;

--No change in capital structure;

--Share repurchases with excess cash flow and asset sales proceeds;

--Revenue declines and cost improvements to moderate for the year given a partial recovery in hydrocarbon prices.

STRUCTURAL CONSIDERATIONS

DOW senior unsecured notes do not benefit from upstream guarantees and are structurally subordinated to about $3.6 billion of subsidiary indebtedness.

Union Carbide Corporation (UC) is a wholly-owned subsidiary of Dow Chemical, and its rating is based on the high degree of financial, legal and business integration into Dow's operations. While the close integration would justify equalizing the rating, the one notch rating difference reflects UC's continuing exposure to asbestos litigation. Union Carbide has $472 million of notes outstanding.

The rating of the Rohm and Haas Company's (R&H) notes and debentures is based on the unconditional and irrevocable guarantee from Dow Chemical. R&H has $1.2 billion in notes and debentures, of which, the 7.86% senior note due 2029 in the amount of $773.9 million is not guaranteed by DOW and not rated by Fitch.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Material progress in deleveraging the balance sheet including redemption of high coupon preferred shares;

--Operating performance improvements and capital spending discipline which generates consistent positive FCF;

--Total debt to operating EBITDA of 2x.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Expectations of meaningful erosion of FCF that compromises financial flexibility;

--Total debt to operating EBITDA of more than 3x.

Fitch has affirmed DOW's ratings as follows:

The Dow Chemical Company

--Long-term IDR 'BBB';

--Senior unsecured revolving credit facility 'BBB';

--Senior unsecured debt 'BBB';

--Short-term IDR 'F2';

--CP ratings 'F2'.

Dow Capital BV

--Senior unsecured debt 'BBB'.

Union Carbide Corporation (Union Carbide)

--Long-term IDR 'BBB-';

--Senior unsecured debt 'BBB-'.

Rohm and Haas Company (Rohm and Haas)

--Senior unsecured debentures and notes guaranteed by Dow Chemical 'BBB'.

The Rating Outlook is Stable.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 2014).

Applicable Criteria and Related Research:

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=985137

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Fitch Ratings
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Fitch Ratings, Inc.
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