Celanese US Holdings LLC Upgraded To 'BBB' On Improved Cash Flows And Profits; Outlook Stable

  • S&P Global Ratings expects operating performance at U.S.-based chemical producer Celanese US Holdings LLC to remain strong in 2019 and beyond despite some weakening from peak 2018 levels.
  • We are raising all of our ratings on the company, including our issuer credit rating on Celanese to 'BBB' from 'BBB-'.
  • The stable outlook reflects our expectation that despite coming off of 2018 highs, cash flow and profitability measures will reflect the company's strengths in its acetyl chain and engineered materials so that the ratio of funds from operations (FFO) to total debt will be around 40%, an improvement over previous expectations of above 30%.
NEW YORK (S&P Global Ratings) April 12, 2019--S&P Global Ratings today took 
the rating actions listed above. The upgrade reflects a considerable 
improvement in the company's 2018 operating performance over 2017 levels, and 
our expectation that cash flow realization will stay high throughout 2019 and 
2020. In our view, Celanese is well positioned to withstand some softening of 
pricing in the acetyl chain (including acetic acid and vinyl acetate monomer) 
in 2019, which reached peak pricing in 2018. We expect pricing to remain at 
historically favorable levels (despite some weakening relative to 2018) 
following the closure of capacity in China, and the absence of any meaningful 
new capacity additions globally. The capacity closure in China is related to 
what appears to be a country drive (across several chemical and nonchemical 
product lines) to clean up the environment. Underlying our expectation for 
operating performance is the assumption for steady GDP growth in global 
markets but especially in the U.S., China, and Europe, the markets in which 
Celanese generates about three-quarters of its revenues. We also expect 
automobile markets, a key end market for the company, to remain relatively 
stable despite a projected weakening in new car sales. At our current rating, 
we believe the ratio of FFO to total debt will remain around 40% in 2019 and 
2020. The ratio peaked at 47% at Dec. 31, 2018, and could weaken to about 40% 
given our assumption for a slight dip in operating performance in 2019.

The stable outlook reflects our expectation that Celanese US Holdings LLC's 
2018 improvement in operating performance and credit metrics is sustainable. 
We believe the current strength in credit metrics leaves the company well 
positioned to achieve our target credit metrics even after accounting for a 
slight weakness in 2019 and 2020 EBITDA relative to 2018. The prospects for 
positive GDP growth in the company's key markets, and ongoing efforts to 
streamline cost structure, should help offset some of the effects of slightly 
weaker pricing. Our assumptions include GDP growth of about 2% in the U.S., 
slightly less than 2% in Europe, and over 5% in the Asia-Pacific (APAC) 
region. Although we generally expect input costs to be stable, we recognize 
the somewhat unpredictable nature of some commodity chemical inputs. We 
believe the company will prioritize its free cash flow generation to fund its 
capacity expansions, bolt-on acquisitions, and shareholder rewards. We expect 
Celanese to maintain financial policies and credit measures that we consider 
appropriate for the current rating, including FFO to debt around 40%. 

We could lower ratings in the next 24 months if adjusted FFO to debt weakens 
to the 30%-35% range on a pro forma weighted average basis. For example, a 600 
basis point (bp) reduction in our base-case EBITDA margin and revenue growth 
could create such a situation. This could result from rapidly increasing raw 
material prices that the company cannot pass on in a timely manner. However, 
we do not expect a rapid rise in the cost of Celanese's main commodity 
chemical raw materials, methanol and ethylene, in our base case. A large, 
debt-funded acquisition or return to shareholders could also result in lower 
ratings. We could also lower the rating if there are major operational risks 
from bringing on the new expanded capacity at the company's Clear Lake 
facility.

We could raise the ratings over the next 24 months if the company achieves and 
sustains FFO to debt above 45%. An unexpected 300 bps increase in EBITDA 
margins from our base case could result in leverage metrics appropriate for a 
higher rating. Possible reasons for this increase are sharply reduced raw 
material costs, greater-than-expected margins following new product 
introductions, and stronger-than-expected earnings growth from bolt-on 
acquisitions. To consider a higher rating, we would also have to believe that 
management was committed to maintaining credit measures and that the potential 
for debt-funded transformational acquisition or share buybacks was remote.
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