Fitch Ratings has affirmed
In addition, Fitch has affirmed
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
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
Strong FCF Generation: Dow's consistent ability to generate strong FCF supports the rating. Through the pandemic and recovery, the company averaged
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
Dow's total debt/EBITDA is well below 2.0x in 2021 and thereafter, which compares favorably with
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
Capital spending of
Share buyback activity in line with company guidance for 2022 and then sized to cashflows thereafter;
Issuance of
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 '
Liquidity and Debt Structure
Ample Liquidity: At
Dow's note issuance further bolsters the company's liquidity position. The company also has
Issuer Profile
Dow is the second largest chemical company globally and the largest in
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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