Fitch Affirms Eastman's IDR at 'BBB'; Outlook Revised to Stable

Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) and 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 revised to Stable from Negative. A full list of ratings is provided at the end of the release.

STABLE OUTLOOK

The revision of the Outlook to Stable reflects Eastman's progress integrating the Solutia acquisition as well as the company's capacity and willingness to significantly reduce debt used to fund its $4.9 billion acquisition of Solutia. Eastman issued $3.6 billion of debt consisting of a $1.2 billion term loan and $2.4 billion of senior unsecured notes to finance the acquisition. Fitch anticipates the company will be strongly FCF positive over the next two years, giving the company the ability to repay debt. Further, Eastman has plans to significantly reduce debt. To that end, Eastman repaid $50 million of its $1.2 billion term loan in the third quarter of 2012, and Fitch expects the company will make substantial repayments through 2013.

Credit metrics are expected to strengthen due to operating income growth combined with debt reduction. Fitch forecasts Eastman's total debt to EBITDA for the year ended 2012 will be near 2.5 times (x). Eastman's debt to EBITDA as reported LTM for Sept. 30, 2012 was 3.5x due to its almost $5 billion of debt and only one quarter of integrated Solutia operating income. On a pro forma basis, including Solutia operating earnings, Eastman had roughly $1.8 billion of EBITDA corresponding to debt to EBITDA of 2.8x for the LTM period. Total debt to EBITDA of 2x - 2.5x is consistent with the rating given Eastman's credit profile.

RATING RATIONALE

The 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 focused 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 heavy-oil-derivative linked chemical production in 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. Ratings are balanced by the company's size; cash outflows for expected pension contributions; volatility in raw materials and energy costs; periodically high working capital requirements; an uncertain macroeconomic environment; and the integration risk and higher leverage stemming from the proposed acquisition.

LIQUIDITY

Eastman has meaningful liquidity with an undrawn $750 million credit facility, a fully available $250 million accounts receivable facility, and $237 million of cash on hand at Sept. 30, 2012. 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 $400 million of FCF in 2013. Eastman projects it will generate a cumulative $2 billion in FCF in 2012 through 2015.

The company's $750 million credit facility expires in December 2016 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.

ENVIRONMENTAL LIABILITIES

Eastman inherited environmental liabilities of Solutia as a result of the acquisition. Eastman has a reserve of $399 million for environmental contingencies. According to Eastman, estimated future environmental expenditures for remediation costs range from a best estimate of $370 million to a maximum of $625 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.

SENSITIVITY/RATING DRIVERS

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

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

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

--Leveraging transactions: debt financed share repurchases, dilutive 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 the ratings of Eastman 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'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Rating Chemical Companies' (Aug. 9, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

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

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