Fitch Affirms Methanex Corp. at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Methanex Corporation's (Methanex) Long-term Issuer Default Rating (IDR), revolving credit facility and senior unsecured notes ratings at 'BBB-'. The Rating Outlook for Methanex is Stable.
KEY RATING DRIVERS
The rating recommendation reflects Methanex's position as the largest global supplier of methanol, global distribution network, relatively low cost production, and moderately levered balance sheet. Rating limitations include the company's single product focus, output constraints facing multiple facilities, structural headwinds from increased Chinese production, U.S. capacity increases and medium to long-term effects of low global crude prices.
The company's credit statistics have weakened in the past year, driven largely by methanol prices moving sharply lower in sympathy with lower crude prices. For the LTM ending Sept. 30, 2015, Fitch-calculated Methanex total adjusted debt/EBITDAR (excluding limited recourse debt) has increased to 3.9x from 2.7x at year end 2014, but is expected to decline to under 3.5x by 2017. FCF has declined to negative -$145 million for the LTM period, from approximately $20 million at YE 2014, given the combination of declining FFO and elevated capex associated with the $1.4 billion relocation and construction of the two Geismar facilities, but is expected to be positive starting in 2016. A full year of accrued earnings for both Geismar facilities combined with lower raw materials prices flowing through will be a positive, but will likely be at least partially offset by top line pricing pressure associated with lower global methanol prices in the near to medium term.
Fitch Ratings expects a recovery from currently depressed methanol prices to be muted in the near term due to the agency's expectations for continued low crude oil prices, and oversupply in global coal markets to continue to lower the cost of coal-to-methanol production, which is traditionally the highest marginal cost production globally. Fitch expects a methanol price recovery to be primarily driven by gradually rising energy prices, as well as growth in methanol used for energy applications, such as fuel blending, and methanol-to-olefins (MTO) processes.
Fitch notes that Methanex's contracts with gas suppliers offer a measure of downside protection for creditors - contracts at several of the company's methanol plants allow Methanex to pay low base natural gas prices but share the upside with natural gas suppliers when methanol prices rise above certain levels. Supply contracts with this structure include the New Zealand, Trinidad, Geismar 1, Egypt and Chile methanol facilities (over 90% of estimated 2015 Methanex production). Cost savings, however, can lag about a quarter due to the company's accounting treatment of costs. 40% of the gas supply for Geismar 2 has been hedged.
LIQUIDITY AND FCF
Methanex has $827 million in liquidity, including $427 million cash on hand and an undrawn $400 million credit facility. The cash balance includes $55 million related to the 50% non-controlling interest in Egypt. For the LTM period ended Sept. 30, 2015, the company produced $470 million in cash from operations. Fitch expects Methanex will be free cash flow negative in 2015 due to capex associated with the completion of Geismar 2, but Fitch expects the company will be free cash flow positive once both Geismar plants come online. The company estimates it has $110 million left to spend on Geismar as of Sept. 30, 2015.
MEOH's notable covenants, including cross-default provisions, apply to MEOH and its subsidiaries, and exclude the limited recourse subsidiaries (the Egypt entity). The limited recourse debt of the Egypt entity is secured only by assets of the Egypt entity, and lenders of those facilities have no recourse to MEOH or its other subsidiaries.
At Sept. 30, 2015, management believes MEOH was in compliance with all covenants and Fitch expects MEOH to continue to have sufficient headroom in its interest coverage and debt to capitalization ratio covenants.
Fitch notes that MEOH has a significant amount of minimum operating lease payments that contribute to its calculation of total adjusted debt which primarily relate to vessel charters and terminal facilities. The minimum payments as of December 31, 2014 are $146 million in 2015, $132 million in 2016, $139 million in 2017, $134 million in 2018, $121 million in 2019, and $859 million thereafter.
Fitch's key assumptions within the rating case for Methanex include:
--Methanol price at current levels for ratings time line;
--No delays with Geismar 2 plant start, both facilities at management's production guidance thereafter;
--Capex at ongoing maintenance after finishing Geismar 2;
--Dividends continue, share repurchases continue with excess cash.
Positive: Future developments that could, in combination, lead to positive rating actions include:
--Increased product diversification;
--Adjusted debt to EBITDAR (not including limited recourse debt) of below 1.5x on a sustained basis.
Negative: Future developments that could lead to negative rating actions include:
--Sustained period of methanol overcapacity depressing pricing and margins;
--Adjusted debt to EBITDAR (not including limited recourse debt) above 3.5x on a sustained basis;
--Large share repurchases or special dividends financed by debt.
--Additional significant disruption in operations of major operating sites.
FULL LIST OF RATING ACTIONS
Fitch affirms the ratings for Methanex as follows:
--Long-term IDR at 'BBB-';
--Senior unsecured credit facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.