NEWMARKET CORPORATION
Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of
Fitch has also affirmed the company's senior unsecured notes and revolving credit facility at 'BBB'. The Rating Outlook is Stable.
NewMarket's 'BBB' rating is supported by its stable earnings profile, ability to generate strong FCF, and conservative capital allocation strategy. Fitch believes the company has the necessary financial flexibility and discipline to absorb any periods of compressed margins related to elevated input costs or overcapacity.
The Stable Outlook reflects the company's conservative capital structure with EBITDA leverage trending below 2.3x. NewMarket's demonstrated cost pass-through ability has allowed it to comfortably withstand the ongoing inflationary environment driving elevated input and transportation costs.
Key Rating Drivers
Stable Earnings Profile: NewMarket benefits from barriers to entry formed by close customer relationships, lengthy qualification processes, and a high cost of product failure. The company is one of four leading producers within the petroleum additives industry. Volumes within this space tend to grow in line with GDP and are influenced by factors such as fleet size, total miles driven, and the adoption of stricter emissions standards and more fuel-efficient vehicles.
Margins are exposed to the price of oil, expanding when oil prices fall and contracting when oil prices rise. This creates a three- to six-month lag between the movement of oil prices and NewMarket's ability to pass the cost through to customers. Through
Solid FCF Generation: NewMarket has historically generated strong positive FCF due to solid EBITDA margins, modest dividends, and manageable capital expenditures. The recent inflationary environment has led to neutral to slightly negative FCF due to a material increase in working capital requirements over the last 24 months. However, Fitch expects these cost pressures to ease over the forecast period, leading to a potential working capital release. Forecasted margins in the 15%-16% range should provide NewMarket with adequate FCF to comfortably meet capex requirements of
Conservative Capital Structure: Fitch expects NewMarket to maintain EBITDA leverage between 1.7x-2.3x throughout the forecast horizon. The company has historically maintained a conservative balance sheet with a commitment to 1.5x-2.0x company-defined net leverage. Although the revolver draw is temporarily elevated due to working capital increases, the balance is expected to decline over the forecast period as working capital requirements moderate.
Even as the company potentially re-tools over the long-term to address electric vehicle penetration, Fitch believes NewMarket will continue a balanced approach to capital allocation. As of
Lack of Diversification: While NewMarket is a leading player in petroleum additives, it is fully exposed to the health of the industry. Sustained high oil prices, as seen recently, can cause margins to contract. The concentration of operations within petroleum additives leads to a relatively high degree of industry-level risk stemming from potential changes in the regulatory environment or consumer behavior. The market has remained generally stable in recent years, but a broad change in industry dynamics could lead to pressure on NewMarket's business and credit profile.
Increasing Electric Vehicle Penetration: Fitch views the continued adoption of electric vehicles (EVs) as a long-term threat to NewMarket's petroleum-based additives but expects the company to mitigate this risk through a conservative capital structure and portfolio diversification into different end markets. The company has identified certain outlets that could insulate from a secular trend towards EVs, including wind turbines, commercial heavy-duty vehicles, and hybrid vehicles.
NewMarket also retains significant financial flexibility with EBITDA leverage typically trending around 2.0x, allowing for potential future organic or inorganic investments. In the long term, a re-tooling of the product portfolio to increase exposure to heating & cooling products for electric vehicles, and the introduction of transmission fluid for multi-speed transmission electric vehicles can help the company mitigate this risk.
Derivation Summary
NewMarket's ratings reflect its stable earnings profile, solid EBITDA margins, and strong FCF generation. Risks to the company include a lack of diversification/size and the ongoing movement toward adoption of electric vehicles, which presents a long-term threat to the company's products. However, Fitch views risk from electric vehicles as minimal through the ratings horizon. The company operates with conservative EBITDA Leverage, like many of its 'BBB' category peers. This is tempered by the relatively narrow focus of its products.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Global recessionary conditions weigh on volume and margins in 2023, with associated recovery afterwards;
Working capital release in 2023 as inventory balances come down due to destocking;
$85MM share repurchases each year from 2023-2025;
Capex of
Dividends of
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
Additional scale and diversification into broader end markets;
Commitment to operating with EBITDA Leverage durably below 1.5x.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
Significant industry capacity additions leading to overcapacity, which would weigh on operating margins, potentially leading to EBITDA Leverage durably above 2.5x;
More aggressive than anticipated capital-deployment policy, leading to heightened execution risk on M&A and capital spending projects.
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
Solid Liquidity: NewMarket has a simple capital structure consisting of a
Having recently fully repaid the
Issuer Profile
NewMarket develops and manufactures highly formulated lubricant and fuel additives that work to improve fuel economy and reduce emissions in motor vehicles. Its Petroleum Additives segment is made up of lubricant additives (~86% of sales) and fuel additives (~14% of sales).
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
20
Mon
Fitch Ratings -
The RWP follows SIB's announcement on
Fitch will resolve the RWP upon the conclusion of the transaction and once it obtains more clarity on the business and financial profile of the merged entity, which may extend beyond the usual six-month review cycle.
Key Rating Drivers
SIB's Long-Term IDR is driven by potential support from the Omani authorities, as expressed by its Government Support Rating (GSR) of 'bb-'. The VR reflects sound market shares, strong government links, and reasonable capitalisation. The VR also considers some weaknesses in asset quality, profitability and funding profile. The RWP on SIB's VR reflects Fitch's view that the bank's credit profile is likely to benefit from the planned merger with HBON.
Government Support: The Omani authorities have a high propensity to support the banking system given the high contagion risk in the sector and the importance of the banking system in building the local economy. However, their financial flexibility and ability to provide support, in case of need, remains limited, despite recent improvements in the sovereign balance sheet.
Improved Operating Conditions: Fitch revised its assessment of the Omani banks' operating environment score to 'bb' from 'bb-' following the Omani sovereign upgrade in
Merger to Benefit Business Profile: SIB's franchise has been growing steadily, particularly in the corporate segment, supported by links to the government that add to business flows as the bank is often involved in government-sponsored infrastructure projects. If the merger is completed successfully, SIB will become the second-largest bank in
Adequate Underwriting Standards: SIB's underwriting standards are broadly comparable with those of peers, with high single-name concentrations a common feature across Omani banks. SIB leverages on its links with the government to access government-related projects, which partly explains its relatively high exposure to construction and real estate (end-2022: 13% of gross loans). We expect the bank to retain its corporate focus post-merger and its concentration on higher-risk industries is likely to only marginally reduce.
Recovering Asset Quality: SIB's Stage 3 loans ratio declined to 5.2% at end-2022 (end-2021: 5.4%), supported by higher than average loan growth as well as continued write-offs. Total reserve coverage of Stage 3 loans was reasonable at 89% at end-2022 (end-2021: 93%). We believe the merger is unlikely to have a material positive impact on the bank's asset quality, with the expected impaired loans ratio remaining around 4.5%-5.5% in the medium term.
Profitability Weaker than Peers: SIB's impairment charges consumed a high 56% of pre-impairment operating profit in 2022, which resulted in an operating profit/risk-weighted assets (RWA) ratio of 1.2%, below the peer average of 1.8% (annualised) in 9M22. In our view, the bank's operating profitability is likely to remain modest in 2023, pressured largely by still-elevated credit costs (2022: 1.5% of average loans).
Lower but Still Adequate Capitalisation Expected: SIB's common equity Tier 1 (CET1) ratio increased to 17.3% at end-2022 (end-2021: 12%), underpinned by an
Merger to Benefit Funding Profile: SIB is more reliant on wholesale funding (end-2022: 23% of non-equity funding) than peers. SIB's liquidity buffer is likely to remain good, underpinned by HBON's large stock of high-quality liquid assets, which covered 29% of customer funds at end-3Q22. As a result of the merger, SIB is likely to expand its deposit franchise, which could improve the bank's funding profile. This drives our positive outlook on SIB's funding & liquidity score.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of SIB's IDRs would require a downgrade of its GSR. A downgrade of the GSR would be triggered by a sovereign downgrade.
SIB's VR will likely be affirmed and removed from RWP if Fitch concludes that the benefits of the merger with HBON will take more time to feed through, or if the transaction is not completed.
The bank's VR could be downgraded on an unexpected economic shock that could result in a weakening of its asset-quality metrics affecting profitability and putting material pressure on capital ratios (with the CET1 ratio falling below 10% without a clear plan to restore it within 18 to 24 months).
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of SIB's GSR and IDR could follow an upgrade of the sovereign rating.
If the merger with HBON is successful, Fitch expects to upgrade SIB's VR based on its assessment of the merged entity's credit profile (particularly, business profile, capitalisation, and funding profile), and remove it from RWP.
VR ADJUSTMENTS
The operating environment score of 'bb' has been assigned below the 'bbb' category implied score for
The asset quality score of 'b+' has been assigned below the 'bb' category implied score, due to the following adjustment reason: historical & future metrics (negative).
The capitalisation and leverage score of 'b+' has been assigned below the 'bb' category implied score, due to the following adjustment reason: risk profile and business model (negative).
The funding and liquidity score of 'b+' has been assigned below the 'bb' category implied score, due to the following adjustment reason: non-deposit funding (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond 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 '
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.
Public Ratings with Credit Linkage to other ratings
SIB's IDRs are linked to the creditworthiness of the Omani authorities.
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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