Fitch Affirms Dow Chemical's IDR at 'BBB'; Outlook Stable

Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDR) and debt ratings of Dow Chemical Company (DOW) as follows:

Dow Chemical Company
--Long-term IDR at 'BBB';
--Senior unsecured revolving credit facility at 'BBB';
--Senior unsecured debt at 'BBB';
--Short-term IDR at 'F2';
--CP ratings at 'F2'.

Dow Capital BV
--Long-term IDR at 'BBB';
--Senior unsecured debt at 'BBB'.

Union Carbide Corporation (Union Carbide)
--Long-term IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.

Rohm and Haas Company (Rohm and Haas)
--Senior unsecured debentures and notes guaranteed by Dow Chemical at 'BBB'.

The Ratings Outlook is Stable.

The ratings reflect DOW's position as the largest North American chemical company with approximately $60 billion of revenues in the last twelve months (LTM) ending March 31, 2012, its highly integrated production streams, which result in significant economies of scale and scope, and leading market positions in many commodity and specialty chemicals segments. These ratings strengths are partly off-set by the moderately levered capital structure, following the Rohm and Haas acquisition, and moderate cash flows impacted by significant working capital requirements.

The company continues to strengthen its capital structure, which has been impacted by the mostly debt-financed acquisition of Rohm and Haas in 2009. In the first quarter of 2012, DOW reduced its gross balance sheet debt by approximately $1.0 billion to $20.6 billion. Gross leverage to operating EBITDA including equity in earnings of affiliates stayed flat at 2.7x at March 31, 2012. Net leverage increased slightly to 2.2x from 2.0x from Dec. 31, 2011 due to reduced cash balances. Fitch expects the company to further reduce its leverage to a range of 2.2 - 2.5x gross and 2.0x or below net by year-end 2012.

The ratings are constrained by moderate cash flows, particularly when considered in relation to debt. LTM to March 31, 2012, DOW's cash flow from operations totaled $4 billion after high Fitch calculated negative working capital changes of $3.4 billion. Free cash flow (LTM) was negative $57 million after $2.7 billion capital expenditures and $1.4 billion dividends including preferreds. Fitch expects the company to marginally improve operating cash flow generation over the next several quarters, given the favorable volume and pricing trends. However, Fitch also notes that a portion of the expected improvements will be off-set by the recently announced 28% dividend increase. This drives Fitch's expectation for DOW being free cash flow neutral in 2012.

DOW has announced multiple expansions of its North American ethylene and propylene capacity in order to take advantage of low feedstock costs. These expansions are expected to increase the company's capital expenditures over the next few years. However, the risks are mitigated by opportunities in domestic and export markets for DOW's downstream products, which likely offer good margins and competitive advantages from low feedstock costs.

The Stable Outlook reflects DOW's robust liquidity. As of March 31, 2012, Dow's liquidity totaled $8.6 billion, consisting of $3.6 billion cash on hand and $5.0 billion available under its undrawn revolving credit facility. The facility is governed by a debt to capital covenant of max. 65%. The covenant is only applicable, if more than $500 million are outstanding under the facility. The revolver will expire in October 2016.

DOW announced today that it was awarded damages of $2.16 billion by the International Court of Arbitration of the International Chamber of Commerce in the company's case against Petrochemical Industries Company of Kuwait (PIC) relating to the K-Dow transaction. Fitch expects some benefit for DOW as a result but the form of remuneration from PIC and the application of any proceeds at this point are undetermined.

The company's robust liquidity makes upcoming debt maturities manageable. DOW has maturities of $1.5 billion remaining in 2012, $0.7 billion in 2013, $2.4 billion in 2014, $1.5 billion in 2015, and $1.0 billion in 2016. Another risk mitigant is the company's proven ability to execute sizeable capital markets transactions to refinance debt as necessary.

Union Carbide is a wholly-owned subsidiary of Dow Chemical and the rating is based on the high degree of financial, legal and business integration into Dow's operations. While the close integration would justify equalizing the rating, the one notch rating difference reflects Union Carbide's still sizeable exposure to asbestos litigation.

The rating of the Rohm and Haas' notes and debentures is based on the unconditional and irrevocable guarantee from Dow Chemical.

Catalysts for an upgrade or Outlook change to Positive could be ongoing tangible progress in deleveraging the company's balance sheet and further improvements in the operating performance, which strengthen DOW's cash flow generation.

Catalysts for a downgrade and or Outlook change to Negative could be a return of adverse economic conditions for the chemical industry leading to deteriorating sales and profits, as well as meaningful negative FCF after working capital changes, capital expenditures, and dividends.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating Chemicals Companies' (May 13, 2010).

Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Rating Chemical Companies Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510626

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Contacts:

Fitch Ratings
Primary Analyst:
Christopher M. Collins, CFA, [phone]
Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Sean T. Sexton, CFA, [phone]
Managing Director
or
Committee Chairperson:
Jason Pompeii, [phone]
Senior Director
or
Media Relations:
Brian Bertsch, [phone]
[e-mail]