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Albemarle Corporation -- Moody's says Albemarle's stock issuance is positive to credit profile, reduces debt and bolsters liquidity in the short term

·13 min read

Announcement: Moody's says Albemarle's stock issuance is positive to credit profile, reduces debt and bolsters liquidity in the short termGlobal Credit Research - 03 Feb 2021New York, February 03, 2021 -- Moody's Investors Service ("Moody's") stated that Albemarle Corporation's (Albemarle) announcement that it intends to issue $1.3 billion in new equity and to use the proceeds to fund growth capital expenditures in the short term and to reduce debt is a credit positive but does not impact the company's ratings or outlook at this time. The equity issuance announced late yesterday is expected to be used for debt reduction in short term debt maturities and to help finance the completion of two lithium growth projects that are again expected to contribute to negative free cash flow this year. The equity issuance also protects the company's good liquidity position and ensures it will not be utilized to satisfy these debt maturities and capex needs. Moody's expects the remaining equity proceeds will be used to shore up balance sheet cash and help fund future growth projects.The equity financing will eliminate the need to refinance short term debt with the delayed draw term loan or in the debt capital markets. Previous to this announcement Moody's anticipated the current maturities of $200 million in notes, $200 million in delayed draw term loans (extended to 2023), roughly $325 million in outstanding commercial paper and $430 million in senior notes maturing in December would be repaid with proceeds from new debt issuance or with proceeds from pending asset sales. Moreover, the remaining capex needed to complete two large lithium projects -- Kemerton and La Negra III -- are putting strains on free cash flow which is expected to be negative again this year and would likely have been financed with a portion of the company's strong liquidity position, which consisted of about $1.3 billion in cash and revolver availability at September 30, 2020.Gross adjusted debt/EBITDA was above 4.0x at September 30, 2020 but was expected to trend favorably and improve in 2022 with the completion and contribution to EBITDA from its growth projects. The equity issuance will help quicken the pace of metric recovery and improve the positioning in the current rating category. Pro forma for the equity financing and debt reduction Moody's expects gross adjusted debt-to-EBITDA to improve meaningfully below 4x, still high for the ratings, and with net adjusted debt to EBITDA below 3x.ESG considerationsESG risk and challenges for Albemarle are considered low as none of its products are hydrocarbons that rely on crude-derived raw materials. The company's three segments provide products with net positive environmental and social benefits: Catalysts help refinery customers adhere to increasingly stringent air and fuel standards; Bromine's flame retardants are used in many end products including fire safety products; and Lithium is a key raw material in batteries used in electric vehicles, which should realize good secular growth and will displace conventional internal combustion engines (ICEs) over time. Fewer ICEs should contribute to a smaller global carbon footprint in powering automobiles, and more stringent environmental regulations should help with this transition in Albemarle's favor.Governance risks are generally less significant for large public companies like Albemarle that articulate their financial and operating strategy, ensure strict compliance and reporting, and have transparent board structure and policies. The company's intent to explore options to conserve cash and improve the balance sheet and liquidity during these uncertain times, including this new equity issuance and previously reducing the pace of capex, reflects favorably on corporate governance issues.Liquidity analysisAlbemarle's liquidity is good, supported by liquid sources as of September 30, 2020 of $702 million in balance sheet cash and $610 million of availability under the $1.0 billion revolving credit facility, due August 2024. The unused portion of the $1.0 billion facility supports the Prime-3 (P-3) short term rating on the company's CP program. As of September 30, 2020, $390 million outstanding amount under the revolving credit facility supported commercial paper outstanding. Liquidity sources are more than enough to finance negative free cash flow (anticipated to be in the range of $200-$300 in 2020) due to high growth capex. Excluding asset sales, Moody's expects free cash flow to be negative in 2021 as well. The eventual execution of asset sales is likely to more than offset any free cash flow shortfall this year.On May 11, 2020, the company amended the covenant of the credit agreement by converting the previously required maximum gross leverage ratio of 3.5x to a net leverage ratio amid the uncertainty of the overall financial impact of the coronavirus. The new maximum net leverage ratio is set at 4.0x until June 30, 2020, increasing to 4.5x through September 30, 2021. The equity issuance and accompanying debt reduction ensures room under this covenant. The test will decline to 4.0x in December 2021 and to 3.5x thereafter. Upcoming debt maturities include approximately $200 million due April 2021 under the 2019 Credit Facility, $430 million in 1.875% senior notes due December 2021, and $325 million usage (as of September 30, 2020) under the revolver.The stable outlook anticipates an improving trend in performance and metrics over the next two years, even if only modest in the early stages of the macro and auto market recovery. Meaningful improvement is anticipated in 2022 and beyond as the company's major La Negra and Kemerton projects are assumed to be completed this year and to contribute to EBITDA growth next year. The stable outlook also assumes the company's capex and M&A growth plans will not outpace organic cash flow, at least until the company achieves or gets sufficiently close to its longer term (unadjusted) net leverage target of 2.0x-2.5x.Moody's would consider an upgrade if significant progress is made in its longer-term lithium growth plan, event risk subsides, RCF/Debt exceeds 30%, and gross adjusted leverage falls below 2.5x on a sustained basis. Moody's would consider a downgrade if actual or projected adjusted gross debt fails to exhibit an improving trend line whereby adjusted net debt/EBITDA fails to be sustained below 3.0x. These metrics include Moody's standard adjustments that add roughly $700 million to debt.Albemarle Corporation (Albemarle), headquartered in Charlotte, North Carolina, is a global producer of lithium and bromine products, catalysts (mostly for oil refining), and specialty chemicals including flame retardants and fine chemicals for use in a diverse set of end markets. Albemarle operates through the following business segments: Lithium, Bromine Specialties, and Catalysts.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. Joseph Princiotta Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Glenn B. Eckert Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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