S&P: Methanex Corp. Downgraded To 'BB+' On Expected Weak Credit Metrics; Outlook Negative; 'BB+' Debt Rating Affirmed
At the same time, we affirmed the 'BB+' issue-level rating on the company's senior unsecured debt. We are assigning our '4' recovery rating to the unsecured debt, indicating our expectation of average (in the upper end of the 30% to 50% range) recovery in the event of a payment default.
"The downgrade reflects the significant drop in 2015 and 2016 methanol prices, resulting from a steep decline in crude oil prices and additional methanol capacity that came online in 2015.," said S&P Global Ratings credit analyst Daniel Krauss.
Methanex's average realized methanol prices have declined by about 50% to $223 per tonne in the second quarter of 2016, compared with average 2014 levels of $437 per tonne. We expect that methanol prices will begin to pick up modestly in 2017 and beyond, but still remain well below previous expectations. As a result, we no longer expect weighted-average credit measures to improve to the stronger end of the significant financial risk profile range, and we have revised our financial risk profile assessment on the company to aggressive from significant. At the current rating, we expect weighted-average credit measures to be in the upper end of the aggressive range, with funds from operations (FFO) to debt in the 15% to 20% range.
The outlook is negative. We expect that methanol prices will remain challenged for the remainder of 2016, before showing modest improvement in 2017. Still we expect 2017 methanol prices to remain well below 2014 and 2015 levels, due to much lower oil prices, as well as a large amount of methanol supply that came online in 2015. We expect demand to improve in the mid - to high-single-digit percentage area annually, due to several large MTO facilities that are coming online in the coming months, as well as increased demand from traditional methanol end uses. At the current rating, we would expect the company to maintain weighted-average FFO to total adjusted debt in the 15% to 20% range. We expect that management's financial policies will remain supportive of credit quality, and have not factored in any debt-funded acquisitions, share repurchases, or large capital expansion projects.
We could lower the ratings within the next 12 months if methanol prices do not begin to show improvement in 2017. This could result from weaker-than-expected demand in traditional end-use applications for methanol, delays in the ramp up of the MTO facilities, or continued weak crude oil prices. Based on our downside scenario, we could lower the ratings if we expect that weighted-average FFO to debt would remain below 15%, and thus we would no longer consider it in the stronger end of the aggressive financial risk profile assessment. We could also lower the rating if softness in the methanol market continues, we expect weaker-than-expected long-term demand growth, or further constraints in natural gas sourcing developed causing us to lower our business risk profile assessment on Methanex.
We could revise the outlook to stable within the next 12 months if the pickup in production and methanol prices were stronger than we are currently forecasting. In such a scenario, we would expect that weighted-average FFO to debt would improve and be sustained at nearly 20%.