Westlake Chemical Corp. Downgraded To 'BBB-' On Economic Downturn; Outlook Stable

  • We anticipate a global economic downturn underway will hurt demand and earnings at Westlake Chemical Corp.'s chlor-alkali and polyolefin businesses.
  • As a result, we expect earnings and credit metrics to weaken below our previous anticipations.
  • We are lowering our issuer credit rating on the company to 'BBB-' from 'BBB'. The outlook is stable. We are also lowering our issue-level ratings by a notch, including our senior unsecured debt ratings, to 'BBB-' from 'BBB'.
  • The stable outlook reflects our anticipation that the company has some cushion under the ratings for a somewhat more severe economic slowdown than we expect in our base case. We anticipate the ratio of funds from operations (FFO) to total debt at the mid to high level of the 20%-30% range.
NEW YORK (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions listed above. The rating action reflects our view of uncertainty in demand and product pricing at Westlake brought about by an economic downturn that we believe is underway. The challenging macroeconomic conditions we anticipate for 2020 will shrink demand for polyolefins and chlor-alkali, weaken their pricing, compress margins, and meaningfully reduce 2020 EBITDA at Westlake. We now anticipate the ratio of FFO to total debt will be 20%-30% over the next two years on a weighted-average basis, compared with previous expectations for above 30%. A key underlying assumption is economic activity will contract in the U.S. and Europe in 2020 and that 2020 economic growth will be about half of what we previously assumed in China. This translates, in our view, into lower demand and weaker pricing in some of the company's products. Westlake's EBITDA has previously been vulnerable to demand and pricing changes. In 2019 for example, EBITDA declined about 33% from 2018 mainly as a result of declining pricing. Still, the company's favorable cost position in the U.S. and increased participation in 2020 in an olefin joint venture should partly offset the impact of the downturn.
Our outlook reflects the expectation that a global economic downturn we anticipate in 2020 will shrink demand for Westlake's chlor-alkali and polyolefins and ultimately meaningfully reduce EBITDA. We believe a drop in demand will more than offset benefits from a decline in input costs and greater integration benefits from an olefin joint venture. Our key assumption is for a demand decline disproportionately higher than our anticipated GDP contraction for the U.S., Europe, and other parts of the world. We expect U.S. GDP will contract at least 0.5% in 2020 and at least 1% in Europe. At the current rating, we anticipate Westlake's key FFO-to-total-debt ratio will be between 20% and 30% over the next two years. We do not assume the company will raise debt at its MLP.
We could lower our ratings on Westlake over the next year or two if--in the current uncertain environment--we believe demand or pricing for the company's products will weaken more than we anticipate in our base case. A predictable consequence will be a greater weakening of earnings and credit metrics than we factored at the rating. For example, EBITDA weakening of two percentage points from the 15% we consider in our ratings (for 2020) would reduce FFO to total debt below 20%, our threshold for a potential downgrade. A less likely cause would be our belief that Westlake's plans for its MLP would increase overall leverage such that the FFO-to-total-debt ratio declines below 20%. We could consider a downgrade if the company no longer controls its operating assets (owned jointly by the MLP).

We could consider an upgrade if the economic downturn is less severe than we expect or its impact on Westlake's earnings is lower than we consider in our ratings. In 2020, we expect Westlake to have some cushion at the rating that increases meaningfully in 2021. However, Westlake's earnings have been volatile in the past. We would raise our ratings in the next few quarters if it becomes apparent the company can maintain FFO to total debt above 30% in 2020.
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