Methanex Corp.’s (MEOH) senior unsecured debt has been upgraded by Moody's Investors Service – the rating unit of Moody's Corp. (MCO) – to Baa3 from Baa1. The upgrade mainly reflects the strong profit margin, credit metrics and favorable industry conditions that supports the Baa3 investment grade rating. The upgrade underscores the company’s strong profit margin and credit metrics as well as favorable industry fundamentals.
Methanex’s improved methanol production asset profile, thanks to capacity expansion and higher production based on low cost natural gas feedstocks, also supported the upgrade.
Methanex’s $150 million senior unsecured notes due 2015 were lifted from Ba1 to Baa3. The rating on $250 million senior unsecured notes due 2022 was also raised from Ba1 to Baa3. Moody’s also upgraded the $300 million senior unsecured notes due 2019 from Ba1 to Baa3. For every note, LGD4 (Loss Given Default) is 58%. These upgrades were aided by Methanex's geographic diversity and strong cash balance.
Moody's provided Methanex a stable ratings outlook. The rating agency expects Methanex to continue generating strong financial metrics over the next two to three years, despite heavy capital spending on new capacity.
Methanex’s conservative financial philosophy and modest debt also aided the rating. Moody's also raised other ratings for the company based on benefits from selling high volumes of methanol logistics assets. However, the rating agency has withdrawn the Corporate Family Rating of Ba1 and Probability of Default Rating of Ba1-PD.
However, the rating agency is apprehensive of inconsistent supplies of natural gas feedstock, exposure to changes in foreign government policies and high operating leases. Moody’s also remains cautious about Methanex’s single portfolio, and the cyclical nature of pricing and demand in the methanol market.
Moody's also stated that the ratings could be downgraded if Methanex does not maintain adequate liquidity, debt to EBITDA of less than 2.8x and retained cash flow to debt of at least 20%. The company will also face a rating downgrade if it fails to generate positive free cash flow after the Geismar I plant start-up in 2015.
Methanex is the world’s largest supplier of methanol. The company believes that its healthy financial position, strong global supply network and competitive-cost structure will strengthen its leadership position in the global methanol industry and help it to continue delivering incremental returns to shareholders.
However, the company may continue to face gas supply restrictions in the near term. Methanex’s production has been crippled by a shortage of natural gas supplies in various regions. It expects short-term natural gas curtailment issues across a number of operations.
Methanex carries a short-term Zacks Rank #2 (Buy). Other chemical companies with a favorable Zacks rank include L'Air Liquide SA (AIQUY) and Air Products & Chemicals Inc. (APD). Both hold a Zacks Rank #2 (Buy).