Last week, Fitch Ratings announced that it is maintaining the long-term Issuer Default Rating (IDR) of The Dow Chemical Company (DOW) at ‘BBB.’ It also affirmed the company’s senior unsecured revolving credit facility and senior unsecured debt ratings at ‘BBB.’ The ratings outlook was kept as ‘Stable’ by the ratings agency.
The ratings have been reaffirmed, keeping in mind Dow’s stature as the largest North American chemical company and revenues of around $60 billion generated in the last twelve months ending March 31, 2012. Fitch also considered Dow’s high level of production integration and large economies of scale while maintaining its ratings.
The ratings also reflect Dow’s leading position in a number of markets such as commodity and specialty chemicals. However, the Rohm and Haas acquisition partially weakened the ratings due to the moderately levered capital structure and restrained cash flows, which were a result of significant working capital requirements.
However, Fitch took note of the efforts Dow is making to strengthen its capital structure. The company’s capital structure was thrown a bit off due to the debt it took on to acquire Rohm and Haas in 2009. Nevertheless, Dow managed to reduce the gross debt in its balance sheet by $1 billion in the first quarter of 2012.
As mentioned earlier, moderate cash flows partially offset the ratings strength. Free cash flow generated by Dow in the last twelve months was a use of $57 million as it spent $2.7 billion in capital expenditures and $1.4 billion in paying out dividends. However, the ratings agency is of the opinion that Dow’s operating cash flow will improve as the year progresses, driven by better volumes and pricing.
Also, Fitch says that Dow’s plans of expanding its North American ethylene and propylene capacities will probably result in increased capital spending over the next few years. However, the company is expected to extract a net benefit out of this expansion due to low feedstock costs and prospects for its downstream products in the domestic and international markets.
Fitch assigned a Stable ratings outlook for Dow due to its strong liquidity position. The company had $3.6 billion in cash as of March 31, 2012 along with an untapped revolving credit facility of $5 billion. Fitch says that Dow’s liquidity position will enable it to meet forthcoming debt maturities.
In addition, Dow was recently awarded $2.16 billion in damages (excluding interests and costs) by the International Court of Arbitration of the International Chamber of Commerce in the K-Dow litigation. The ratings agency believes that the damage award will help Dow in some form although the method of payment and use of the proceeds is not known as of now.
Dow, which competes with EI DuPont de Nemours & Co. (DD), retains a Zacks #3 Rank, indicating a short-term Hold rating. We currently have a long-term Neutral recommendation on the shares of Dow.
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