Fitch Affirms Eastman's IDRs at 'BBB/F2'; Outlook Stable

Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR) and senior unsecured debt ratings of Eastman Chemical Company (Eastman) at 'BBB'. Fitch has also affirmed Eastman's Short-term IDR and commercial paper rating at 'F2'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

Approximately $4.4 billion in debt is affected by today's rating action.

KEY RATING DRIVERS

Eastman's ratings reflect the company's portfolio of differentiated chemical products, solid pricing power in key end user markets, good vertical integration of production streams along the acetyl, polyester and olefin value chain, economies of scale at its production sites (particularly at its main Kingsport, Tennessee location), and access to low cost light feedstocks in North America, which has improved the company's global cost competitiveness, particularly when compared to Europe.

Eastman's ratings are also supported by the company's ongoing portfolio high-grading, with shedding of lower margin and commoditized businesses and expansions into higher margin businesses such as filter tow markets in Asia, specialty plasticizers, and Tritan co-polyester. The ratings are balanced by the company's size, volatility in raw materials and energy costs, periodically high working capital requirements, and higher leverage stemming from the company's Solutia acquisition.

Credit metrics have strengthened as expected due to operating income growth combined with debt reduction. Fitch forecasts Eastman's total debt to EBITDA for the year ended 2013 will be moderately below 2.5(x). Eastman's debt to EBITDA as reported LTM for Sept. 30, 2013 was 2.5x. Total debt to EBITDA of 2x - 2.5x is consistent with the rating given Eastman's credit profile and supports the Stable Outlook.

Eastman has meaningful liquidity with an undrawn $750 million credit facility, $100 million available under its $250 million accounts receivable facility, and $222 million of cash on hand at Sept. 30, 2013. The company has minimal near term maturities, mostly consisting of term loan amortization payments.

Eastman's next large maturity is its 3% $250 million due December 2015. Fitch expects the company to generate at least $500 million of FCF and forecasts operating EBITDA of roughly $1.9 billion in 2014.

The company entered into a new revolving $1 billion credit facility on Oct. 31, 2013. The facility expires in October 2018 and is utilized as a backstop to Eastman's commercial paper program. It contains a covenant limiting debt to consolidated EBITDA to 3.5x with a carve-out for the accounts receivable facility and EBITDA calculated on a pro forma basis to include acquisitions. Eastman has adequate cushion with respect to the covenant.

Eastman has a reserve of $373 million for environmental contingencies, including liabilities inherited from the Solutia acquisition. According to Eastman, estimated future environmental expenditures for remediation costs range from a best estimate of $344 million to a maximum of $600 million. The largest of these liabilities are related to PCB contamination at sites in Anniston, Alabama and Sauget, Illinois. PCBs have not been manufactured at the sites in decades, and clean-up efforts have started and are well defined. Fitch believes these costs are manageable for the company over time given its FCF generation.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

--Total debt to EBITDA of 1.5x on a mid-cycle basis in combination with maintenance of annual FCF over $500 million.

Negative: Future developments that could lead to negative rating actions include:

--Leveraging events: debt financed share repurchases, leveraged acquisitions, etc.;

--Sustained negative FCF leading to incremental borrowings;

--A major operational issue or global recession which pushed EBITDA lower on a sustained basis and not offset by adjustments in Eastman's cost structure.

Fitch affirms Eastman's ratings as follows:

--Long-term IDR at 'BBB';

--Senior unsecured revolving credit facility at 'BBB';

--Senior unsecured debt at 'BBB';

--Short-term IDR at 'F2';

--Commercial Paper at 'F2'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (August 2013);

--'Rating Chemical Companies' (August 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Rating Chemical Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682313

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816917

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Fitch Ratings
Primary Analyst
Christopher M. Collins, CFA
Director
[phone]
Fitch Ratings, Inc.
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Chicago, IL 60602
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Mark C. Sadeghian, CFA
Senior Director
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