Fitch Ratings has affirmed Dow Inc.'s Long-Term Issuer Default Rating (IDR) at 'BBB+', and Dow Chemical Company's IDR at 'BBB+', and Short-Term IDR at 'F2'.

In addition, Fitch has affirmed Union Carbide Corporation's IDR at 'BBB', and has assigned a 'BBB+' rating to Dow Chemical Company's new senior unsecured note issuance. The Ratings Outlooks remain at Positive.

The ratings reflect Dow's significant scale and diversification, ability to consistently generate strong cash flow, and low-cost position with feedstock flexibility leading to relatively stable margins. Dow remains the largest North American chemical company with patent-advantaged products representing a material portion of revenues, and leading market positions in many commodity and specialty chemicals segments.

Key Rating Drivers

Diversification, Flexibility Moderate Cash Flow Risk: Dow's strong end-market and geographic diversification supports its credit profile. Dow is the second largest chemical company globally, after BASF, and is the largest in North America. In 2021, its revenue was split fairly evenly between North America, EMEA, and and the rest of the world. Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings generated 51%, 31%, and 18% of 2021 revenue, respectively.

Dow benefits from access to advantaged natural gas-based feedstocks, as well as the industry leading feedstock flexibility of its European assets. However, recent demand destruction in the European markets limits the benefits of this flexibility. Regardless, Fitch believes the company will benefit from this feedstock flexibility and ultimately maintain relatively resilient, through-the-cycle EBITDA margins, which Fitch projects to be in the mid-high teens throughout the forecast period. Dow generated over $6 billion in operating cash flow in 2020, highlighting its ability to deliver cash flows in a weak demand-driven price environment.

Strong FCF Generation: Dow's consistent ability to generate strong FCF supports the rating. Through the pandemic and recovery, the company averaged $2.6 billion in annual FCF and maintained an average FCF margin of 5.8%. Even with somewhat elevated capital spending for sustainability and growth over the next few years, Fitch expects Dow to generate average annual FCF of $2.6 billion (4.9% FCF margin) over the forecast period. In a sustained downturn, Fitch expects that Dow would moderate capital spending as they have done in the past.

Sustained Decreased Leverage/Target Change: Dow management has decreased it target leverage level from 2.5x-3.0x adjusted net debt/EBITDA to 2.0x - 2.5x. While the company is issuing notes to further bolster its liquidity, Fitch expects it to continue paying down debt, at a more moderate pace, over the forecast period. The lower absolute debt level and expectation for continued EBITDA generation in Fitch's forecast lead to leverage trending toward the mid 1x range, albeit at a more moderate pace.

Polyolefins Exposure: With 51% of its revenue generated by the more commoditized Packaging & Specialty Plastics segment, Dow has exposure to volatile olefin, polyolefin, and hydrocarbon feedstock prices which can introduce significant volatility to EBITDA margins. Fitch believes that the polyolefins market will remain relatively balanced throughout the forecast period. The return of existing polyolefin production from pandemic- and weather-related shutdowns and the addition of new announced capacity is balanced by virgin plastic demand for food packaging and consumer applications that is growing faster than GDP.

Derivation Summary

Dow's size, product mix and cash flow/leverage profile compare favorably to investment grade peers. It is the second-largest chemical company globally, after BASF SE (A/Stable) and has higher exposure to value-added production leading to higher margins than BASF and comparable margins to LyondellBasell Industries N.V.(BBB/Positive). Dow is also larger than diversified chemicals and manufacturing peers Dupont de Nemours, Inc. (BBB+/Stable), Ecolab Inc. (A-/Stable), and Celanese (BBB-/Stable). Fitch expects Dow's EBITDA margins in the mid to high teens to be lower than Dupont, Ecolab, and Celanese, but its FCF profile is consistent with these peers.

Dow's total debt/EBITDA is well below 2.0x in 2021 and thereafter, which compares favorably with DuPont and Ecolab which are typically between 2.0x and 2.5x. Fitch believes LyondellBasell will generally maintain its total debt/EBITDA around 2.5x. However, Dow's cash flows are relatively more volatile when compared against the more resilient and predictable cash flow profiles of Ecolab primarily due to Dow's exposure to certain hydrocarbon feedstocks.

Key Assumptions

A modest top line increase in 2022, reflecting 2H22 pricing moderation and softer volumes; more substantial moderation in price and volume in 2023 and 2024 to reflect a reversion to more normalized prices;

Margin compression in 2022, reflecting raw material cost pass-through ability diminishing in 2H22 coupled with volume weakness in Europe. Margins lower in 2023 reflecting the impact of increased polyolefins capacity and broader impact of a cyclical downturn. Margins improve to midcycle levels thereafter. Margins average about 16.5% over the forecast period;

Capital spending of $1.9 billion in 2022 per management guidance; capex in 2023 and beyond remains elevated on sustainability and growth-oriented projects;

Share buyback activity in line with company guidance for 2022 and then sized to cashflows thereafter;

Issuance of $1.0 billion notes, split equally between a 10-year and a 30-year tranche.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Total debt/operating EBITDA sustained below 1.5x or Net debt/operating EBITDA sustained below 1.0x;

Consistent generation of FCF and maintenance of FCF margins above 5%;

Continued track record of prudent and cashflow-linked capital allocation where balance sheet strength and liquidity are prioritized over shareholder distributions, particularly in times of stress.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Total debt/operating EBITDA sustained above 2.3x or Net debt/operating EBITDA consistently sustained above 1.8x;

Inability to maintain consistent FCF generation;

Deviation from financial policy where shareholder distributions are prioritized over debt reduction during weaker earnings periods.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Ample Liquidity: At Dec. 31, 2021, Dow had approximately $3.0 billion in cash on hand and a $5 billion revolving credit facility maturing in November 2026. The North American A/R facility allows for borrowing capacity up to $900 million and the European A/R facility has borrowing capacity of EUR500 million and mature in November 2022 and July 2023, respectively.

Dow's note issuance further bolsters the company's liquidity position. The company also has $3.4 billion of committed bilateral lines with maturities of between one and five years, and combined with Fitch's expectations for positive FCF generation throughout the forecast, Fitch believes Dow will maintain ample liquidity throughout the forecasted period.

Issuer Profile

Dow is the second largest chemical company globally and the largest in North America. Its portfolio of plastics and packaging, industrial intermediates, coatings and silicones businesses delivers a broad range of differentiated science-based products and solutions.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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