Basic Industry Flashcards
AIR PRODUCTS AND CHEMICALS INC (APD)
Pure play industrial gas company (third largest supplier) with a stable business model and strong financial performance, IG commitment. Benefits from long-term contracts and a diverse customer base across various industries. Significant investments in hydrogen projects and commitment to sustainability. But targeting inorganic growth, likely to borrow
A2/A/A+
Chemicals - Americas
$6.90bn in index across 9 issues
CELANESE US HOLDINGS LLC (CE)
Global technology leader in the production of specialty materials and chemical products. Strong market position in acetyl products and engineered polymers, which are essential to various industries. Recent increase in debt due to acquisitions (DuPont’s Mobility & Materials segment), but robust cash flow and aims to reduce leverage (target: 3x). High leverage, integration risk.
Remains committed to IG ratings, and is applying strong FCF toward debt reduction, although pace of deleveraging is slower than originally anticipated. Rating agencies seem comfortable they will reach their 3X target, which will likely be YE25/early 26 vs their original YE24 intention. While they have not yet seen material customer inventory builds after many quarters of destocking, volumes and margins should still show gradual improvement. Neutral - while there is some prospect for further tightening, neutral reflects the overall compressed level of spreads in Basic Industries.
BBB-(Neg)/BBB-
Chemicals - Americas
$7.15bn in index across 7 issues
DOW CHEMICAL COMPANY (THE) (DOW)
Diversified portfolio of high-performance materials, industrial intermediates, and plastics. Focuses on operational efficiency and sustainability, which supports its strong cash flow and balance sheet. Dow’s strategic investments in innovation and sustainability initiatives further bolster its credit profile. However, the company faces risks from fluctuating raw material costs and global economic conditions, which can affect its profitability. Third best credit in basic materials
Stable fundamentals, diversified profile, conservative financial policy. Not yet seeing significant customer inventory restocking, reflecting slowed consumer spending. Margins and volumes slowly improving, but still below mid-cycle levels. Excess global olefins supply also a headwind. Neutral – spreads appear fair vs peers.
BBB/BBB/BBB+
Chemicals - Americas
$11.88bn in index across 16 issues
DUPONT DE NEMOURS INC (DD)
Provides tech-based materials and solutions through: Electronics & Industrial (materials and solutions for semiconductors), Water & Protection, and Corporate & Other segments. Patent protections but adjusts its businesss portfolio bringing execution risk
DuPont is continuing its multi-year downsizing, announcing in May they would split up into three companies, comprised of Electronics ($1.16B EBITDA), Water Solutions ($360M), and DuPont remainco ($1.6B EBITDA), with the latter retaining its Protection, Industrial, and Adhesives businesses. Current bonds will remain DD obligations, and their intent is to remain IG. There has already been a partial make-whole on the 2038s, with potential they refi all the debt before closing in 24 months. PFAS liabilities appear containe due to cost sharing agreement with Chemours. Until the splitup is completed, DuPont likely keep gross and net leverage around 2.5X and 1.5X respectively. Ranking reflects proforma business and likely credit profile of new DuPont/remainco. UW - with spead of ~50bps , the prospect of make-wholes is increasing priced in.
Baa1(Neg)/BBB+(Neg)/BBB+
Chemicals - Americas
$7.25bn in index across 4 issues
EASTMAN CHEMICAL COMPANY (EMN)
Specialty materials company in Kingsport, TN. Vertically integrated into key feedstocksand intermediates, high margin business with diversified products, but cyclical end markets, acquisitive, and shareholder friendly
Customer destocking has largely ended and while volumes are improving in most segments, there does not appear to be signficant inventory builds in most end-markets. With debt remaining in their target range, capital priorities are capex (modestly elevated as they build two more polyester recycling plants), dividends, bolt-on acquisitions, and share repurchases. LTM gross and net leverage (3.15X, 2.8X respectively) were flat sequentially at 6/30/2024, but will likely return to 3X and 2.6X by the end of the year, consistent with rating agency expectations. Neutral - discount to Dow and LYB justified by higher leverage.
Baa2/BBB
Chemicals - Americas
$3.65bn in index across 6 issues
INTERNATIONAL FLAVORS & FRAGRANCES INC (IFF)
Manufactures and sells cosmetic active and natural health ingredients for use in various consumer products through four segments: Nourish (specialty food ingredients), Health & Biosciences, Scent, and Pharma Solutions. Relatively defensive, committed to IG but activist investors still involved and has been slow to delever following acquisition in 1Q21
Announced divestiture of Pharma segment for ~$2.4B after-tax, with proceeds earmarked for debt reduction when closes in in 1H25. Combined with sale of cosmetics segment for $730M after-tax in April, and 50% dividend cut, should allow company to retain its targeted IG credit profile with leverage moving toward 3X target by YE25. Moody’s and Fitch already back to stable outlooks, with S&P likely to follow. Going forward, mgmt focus will be improving results in its more commodity like functional ingredients segment. Anti-competitive investigations of the fragrance industry are an overhang until resolved. Neutral - pharma sale, deleveraging pretty well priced in
Baa3/BBB-/BBB-
Chemicals - Americas
$7.65bn in index across 8 issues ($5.95bn 144a)
LyondellBasell Industries NV (LYB)
Global leader in the petrochemical industry, involved in the production of chemicals, polymers, and fuels. Strong cash flow generation, robust balance sheet, and commitment to maintaining an investment-grade credit rating. Diversified product portfolio and strategic investments in sustainability initiatives also enhance their long-term financial stability.
Large and well diversified olefins and polyolefins producer, which are cyclical markets . Mgmt has been guiding to a better2H24, as customers begin to restock inventories. Following significant debt reduction, net leverage was 1.5X at YE23 vs. 2.5x target. Excess cash flow is directed towards shareholder returns (target payout of 70% of FCF). While mgmt laid out ambitious normalized EBITDA targets that they likely won’t meet, someimprovement is expected. Neutral - one of the more cyclical/volatile IG chemical names, bonds appear fair value relative to Dow and Eastman.
Baa2/BBB/BBB
Chemicals - Americas
$10.13bn in index across 14 issues
NUTRIEN LTD (NTRCN)
Leading provider of agricultural products and services, including potash, nitrogen, and phosphate. Strong cash flow generation, solid balance sheet, supported by its diversified product portfolio and global market presence. Exposed to commodity price volatility and agricultural market cycles. Aggressive financial policy, shareholder friendly.
Nutrien is a stable BBB credit with a solid position in potash and nitrogen. Fertilizer prices continue to normalize towards mid-cycle ranges from 2022 peaks resulting from the Russia/Ukraine war, but demand trends remain supportive for volume growth. FCF should remain healthy but excess cash is expected to be primarily used towards shareholder returns. FCF should remain healthy but excess cash is expected to be primarily used towards shareholder returns. Neutral - spreads appear value vs peers.
Baa2/BBB
Chemicals - Americas
$8.63bn in index across 16 issues
OLIN CORP (OLN)
Leading manufacturer of chemical products and ammunition. Their products include chlorine, caustic soda, and various epoxy products. Olin’s vertically integrated operations and strong market position in the chemicals and ammunition sectors support their financial stability. Their consistent cash flow and strategic investments in growth areas are attractive to credit investors.
CEO turnover and macro uncertainty likely delay potential upgrade activity from S&P, which has had OLN on positive outlook for over a year; expect y/y EBITDA improvement in 2024; about 3 pts of upside if IG upgrade and trades in line with low BBB rated HUN
Ba1/BB+/BBB-
Chemicals - Americas
$1.68bn in index across 3 issues
SHERWIN-WILLIAMS COMPANY (THE) (SHW)
Engages in the manufacture, distribution, and sale of paints, coating, and related products to professional, industrial, commercial, and retail customers
Higher-quality name in BBB chemicals with relatively lower earnings volatility than chemicals peers and strong pricing power. That said, limited upside given concentrated residential housing exposure and continued headwinds from slowdown in residential construction and remodeling activity. Balance sheet is strong and should be able to weather near-term headwinds. UW - appears rich relative to peers with limited upside.
Baa2(Pos)/BBB/BBB+
Chemicals - Americas
$7.93bn in index across 13 issues
UNIFRAX HOLDING CO (FRAX)
Specializes in high-performance specialty materials (fiber insulation products) used in various industrial applications. Their focus on innovative materials supports long-term financial stability.
Have become less constructive on the name as confidence in management has waned. High leverage, cyclical end markets and 2025 debt maturities are all concerning given the macro outlook. Overlevered, cyclical, needs to be refi’d
Caa1/D/CC
Chemicals - Americas
$1.20bn in index across 2 issues
BARRICK NORTH AMERICA FINANCE LLC (ABXCN)
One of the world’s largest mining companies, significant pf of Tier 1 gold and copper assets. Strong balance sheet, significant liquidity. Exposed to fluctuations in gold and copper prices, and operational challenges
Second largest gold producer with low cost operations and strong financial profile. Consistently operates with low net leverage due to large USD$4B cash balance. Elevated geopolitical and country risk at mines in high-risk jurisdictions. Management targets annual reserve and production growth through 2030. Move to Neutral from OW as now priced similar to Newmont.
A3/BBB+
Metals & Mining - Americas
$3.77bn in index across 6 issues
CLEVELAND-CLIFFS INC (CLF)
Leading supplier of iron ore pellets and steel products in North America. Their business model includes vertically integrated operations from mining to steel production. Financially, Cleveland-Cliffs benefits from strong demand for steel products and strategic acquisitions that enhance their market position.
At forecasted EBITDA, FCF is modestly positive, which means minimal opportunity to deleverage. Looking further out, as the North American steel market remains tariff protected, steel prices are anticipated to be more supportive, which will translate into better FCF generation and deleveraging opportunities. For color, over the past two years, HRC steel pricing has averaged ~$860/t and ranged from ~$660/t to ~$1,180/t. Current spot pricing is ~$710/t. The macro environment will of course play a role in the direction of steel prices and volumes given how cyclical the main end markets (construction, automotive etc.) for steel are. Capital allocation will be directed towards debt reduction. Management has stated in the past that it does not desire an IG rating. some event risk in the name given they still have interest in US Steel
Ba3/BB-/BB-
Metals & Mining - Americas
$3.06bn in index across 6 issues
FREEPORT-MCMORAN CORP (FCX)
Mining of mineral properties in NA, SA, and Indonesiona: expores for copper, gold, moybdenum, silver and other metals. Benefits from its large-scale mining operations and strong cash flow generation. Strategic focus on operational efficiency and disciplined financial policy. But exposed to gold and other base metals (gold: 90% revs).
Benefiting from high copper, gold, and molybdenum prices, which account for 73%, 20%, and 7% of revenue respectively. The company is focused asset efficiency and new leaching techniques on existing stockpiles, rather than acquisitions or divestitures. High exposure to EM countries, currently in process of renegotiation permits in Indonesia. Long term fundamentals remain supportive given increasing demand for copper and limited capacity coming online over the next few years. Finallly reached 9B status with S&P upgrade in May. Net leverage likely to remain <1X, with excess cash flow distributed to shareholders. Neutral - bonds appear fair value relative to peers.
Baa2/BBB-(Pos)/BBB(Pos)
Metals & Mining - Americas
$5.32bn in index across 8 issues
NEW GOLD INC (NGDCN)
Intermediate gold mining company that develops and operates mineral properties in Canada, primarily exploring for gold, silver, and copper deposits. Their business model focuses on leveraging their assets, such as the Rainy River mine and the New Afton project, to generate consistent cash flow and support growth initiatives. Financially, New Gold benefits from strong gold and copper prices, which enhance their revenue and profitability.
trades ~40 bps inside (was in line with last quarter) the single B index, so valuation looks a little rich; gold and copper prices remain highly supportive for elevated FCF generation; FCF interest option in New Afton introduces some capital allocation uncertainty, so have at neutral
B3/B
Metals & Mining - Americas
$0.40bn in index across 1 issues
