Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings of 'BBB'/'F2' on
Fitch has also affirmed the 'BBB' rating of Lyondell's and its subsidiaries' senior unsecured debt and 'F2' rating of the company's CP program. The Rating Outlook is Positive.
The ratings reflect Lyondell's significant scale and diversification, feedstock flexibility, consistently strong pre-dividend cash flow generation, and balanced capital allocation plan that supports its investment-grade financial profile. The Positive Outlook considers the company's recent debt reduction efforts, anticipated continued positive FCF and an expectation that the company's leverage will fall below the positive sensitivities during the forecast horizon. Fitch expects that
Key Rating Drivers
Macro Weakness Supported by Solid Cash Flow and Liquidity: Fitch expects that Lyondell will maintain robust FCF and liquidity in 2023 despite weakness in
Scale, Natural Gas and Feedstock Advantage: Lyondell benefits as the third largest chemical company globally, after
Increased Focus on Shareholder Returns: With much of the company's planned capital spending and deleveraging completed, Fitch expects that Lyondell will utilize its FCF - forecasted to be over
Improved Leverage Visibility. Fitch believes that LYB's increasing scale combined with its gross debt targeting improves visibility on leverage through the forecast period. Lyondell's scale increased significantly following the
LYB's portfolio of other investments and its new PO/TBA plant provide incremental capacity and earnings generation. Fitch estimates that as a result of incremental capacity additions, mid-cycle EBITDA will be in the
Planned Refinery Exit. The company's announced intention to shut its
Increased Focus on Sustainability. Fitch believes that Lyondell's new Circular and Low Carbon Solutions business unit demonstrates continued focus on providing commercial solutions and materials generated from mechanical and molecular recycling processes and renewable feedstocks. Other initiatives include a potential venture with Air Liquide,
Derivation Summary
Lyondell's margin and cash flow risk profile are similar to peers with commodity price exposure, but profitability in the mid-teens is generally higher than Huntsman in the low double-digits given Lyondell's considerable scale and favorable cost position. Dow typically generates slightly higher margins than Lyondell given its lower polymers exposure and higher value-add exposure, while polymers-oriented Westlake generally sees more margin volatility. Lyondell's feedstock-advantaged North American plants provide it with better margins than its much larger peer
Key Assumptions
Key Ratings Case Assumptions:
Drop in sales in 2023 driven by recessionary conditions and a more severe drop in
EBITDA margin compression driven by lower capacity utilization, partially offset by some easing of raw materials cost pressures. Fitch expects margins to trough in 3Q23, with subsequent improvements into 2024. Margins also benefit from a mix shift away from refining;
Benefits from Lyondell's PO/TBA expansion build into 2024;
Benefits from Lyondell's announced
Dividends of
Capex forecasted at 4-5% of revenue.
Fitch assumes no additional M&A or JV investments. Lyondell allocates its FCF to share buybacks over the projection period. Any incremental M&A or investments would be funded through FCF and balanced against share buybacks.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Demonstrated robust earnings resiliency, leading to midcycle EBITDA leverage sustained below 2.0x;
Continued track record of balanced capital allocation, including moderately sized M&A and linkage of shareholder activity to cash flows.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Midcycle EBITDA leverage sustained above 2.5x;
Deviation from financial policy where shareholder distributions are prioritized over maintenance of gross debt levels, or large transformational M&A activity where there is no clear path to deleveraging;
A sustained downward trend in EBITDA margins signaling a structurally weaker polymers market or failure to innovate and compete in core end-markets, resulting in an erosion of the company's leading market position.
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
Issuer Profile
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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