Fitch Ratings has assigned a rating of 'A' to E.I. DuPont de Nemours and Company's (DuPont) planned $2 billion senior unsecured notes issuance. The notes are expected to be split into $500 million notes due 2016, $1 billion notes due 2021 and $500 million notes due 2041. The notes will rank pari passu with the company's existing senior unsecured debt. The company intends to use net proceeds from the offering to contribute to the company's principal U.S. pension plan, to refinance existing debt including a portion or all of the company's $750 million 5.0% notes due Jan. 15, 2013 and the 5.875% $1 billion notes due Jan. 15, 2014, to be invested in cash equivalents and short-term marketable securities and for general corporate purposes. A full rating list is shown below.
The ratings reflect DuPont's leading brands and market positions in many chemicals segments, its global reach and highly integrated operations that generate competitive advantages. The company's R&D-based and innovative product portfolio drives a substantial portion of the revenue growth. DuPont targets to grow revenues by 10% annually from 2010 to 2012 and to generate 30% of revenues with products that were introduced within four years. These products enable high operating margins and meaningful cash flows. In the last 12 months (LTM) ended June 30, 2010, the company's operating EBITDA margin reached almost 18%. LTM Cash flow from operations totaled approximately $4.3 billion, well covering $1.1 billion capital expenditures and $1.5 billion dividends, thus resulting in free cash flow of nearly $1.7 billion.
The ratings also incorporate a prudent financial strategy, which is characterized by a low net debt leverage, ample liquidity and very manageable debt maturities. As of June 30, 2010, DuPont's net debt to operating EBITDA ratio was 1.2 times (x). The planned debt issuances do not significantly change the low net debt leverage as the majority of net proceeds are used for debt refinancing. At the same time, liquidity totaled almost $6.5 billion, consisting of approximately $4 billion cash and equivalents including short-term marketable securities and $2.5 billion of undrawn revolving credit facilities including the company's main $2 billion revolver, which will expire in July 2011. DuPont has $651 million short-term debt maturing in the remainder of 2010 and in 2011. The next major maturities are $400 million 4.75% notes due in 2012. Apart from the $750 million 5.0% notes and the $1 billion 5.875% notes that DuPont intends to redeem at least partially with net proceeds from the current offering, $1 billion debt will mature in 2013, followed by $500 million in 2014 and $1.4 billion in 2015.
The Negative Outlook is based on the expected decline of the licensing income from DuPont's anti-hypertension drug franchise Hyzaar and Cozaar. Key patents in the U.S. and Europe expired earlier this year. Japan will follow in December 2011. Although the company has raised its guidance for licensing income to $460 million-$480 million from $350 million-$400 million for fiscal 2010, given slower than expected penetration of the market by generic competition, the revised guidance still represents a significant fall from the more than $1 billion pre-tax licensing income generated in fiscal 2009. For 2011 and 2012, the company expects that licensing income from Hyzaar and Cozaar will fall below $100 million annually.
The Negative Outlook also considers potential setbacks in the economic recovery in the remainder of 2010 and 2011. These setbacks could adversely impact demand for DuPont's cyclical chemicals products and would slow down the company's efforts to reach or exceed pre-recession revenue and profit levels over the next several quarters.
A return to recessionary market environments, severely affecting sales and earnings or meaningful cash outflow for shareholder-friendly actions could be catalysts for a downgrade.
A fast rebound to pre-recession revenue and profit levels which translate into substantial free cash flow after capital expenditure and dividends could be catalysts for an Outlook revision to Stable.
Fitch currently rates DuPont as follows:
--Long-term Issuer Default Rating (IDR) at 'A';
--Senior unsecured debt at 'A';
--Bank credit facility at 'A';
--Short-term IDR at 'F1';
--Commercial Paper at 'F1'.
The Outlook is Negative.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' Aug. 16, 2010;
--'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=546646
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