Fitch Rates Methanex Corporation's New Unsecured Notes 'BB'/'RR4'; Outlook Negative

(The following statement was released by the rating agency) Fitch Ratings-Chicago-17 September 2020: Fitch Ratings has assigned a 'BB'/'RR4' to the new unsecured notes issued by Methanex Corporation. Proceeds from the notes will be used to repay the $250 million notes due in 2022, with the remaining $350 million used to enhance liquidity. The 'BB' rating reflects the company's position as the largest global supplier of methanol, with a global distribution network and 8.1 million metric tons (MT) in current production capacity. The ratings also reflect the company's portfolio high-grading, including relocation of Chilean plants to the U.S.; the company's good historical financial performance, driven by access to low cost and stranded natural gas feedstocks; and solid historical FCF and leverage metrics. Offsetting considerations include methanol's sensitivity to crude and natural gas prices and China's demand, particularly at methanol-to-olefins (MTO) facilities; the negative impact that a prolonged trade war with China could have on the industry; and the significant expense associated with maintaining shipping and storage facilities as a global player in methanol. The Negative Outlook reflects the impact that the pandemic-linked decline in prices has had on the company's forecast leverage metrics and liquidity profile. Fitch's base case forecasts Methanex's leverage metrics will be considerably above 'BB' rating tolerances over the next 18 months to 24 months due to the lingering negative impacts of the coronavirus pandemic on global demand and pricing. Management has taken proactive measures to bolster liquidity, including cutting its dividend by approximately $100 million per year, idling its Titan and Chile IV plants and delaying G3 spending until the pricing environment improves. Additionally, with the new unsecured notes addressing the 2022 maturities, Methanex faces no significant maturities until 2024. The company maintains some flexibility with respect to capital deployment, with the option to reduce its revolver balance, repay or extend the construction loan, and/or resume Geismar 3 (G3) spending depending on the rate at which methanol pricing recovers. However, the elevated financial risk related to the increase in debt on the balance sheet and the execution risk associated with resuming G3 spending continue to pressure the company's credit profile. Key Rating Drivers Improved Strategic Flexibility: Methanex's new unsecured notes issuance allows for some strategic flexibility with respect to capital deployment and G3. With an improved liquidity position and no significant maturities until 2024, the company has the option to use its cash on hand, Delayed Draw Term Loan (DDTL) and revolving credit facility to resume G3 spending if the methanol pricing environment improves sufficiently, or to repay its construction loan and maintain a lower debt balance if it believes that the project will require further deferrals. Methanol Prices Pressure Margins: Average realized price for Methanex fell to $256/ton in 4Q19 and then to $211/ton in 2Q20. Fitch believes that 2Q20 represented the bottoming out of pricing and utilization rates, with the coronavirus pandemic's impact on demand expected to subside over time. Fitch views the company's MTO segment - a leading growth area in recent years - as especially vulnerable to prolonged demand pressure relative to recent performance, particularly with ethylene and polyethylene prices expected to remain depressed throughout the ratings horizon. The sharp fall in methanol prices highlights the relatively higher cash flow risk for methanol producers like Methanex relative to Investment Grade chemical peers. Elevated Leverage Profile: Fitch believes that Methanex has the funding to complete the cost-advantaged G3 expansion, with $727 million in combined availability under its delayed drawn term loan and revolver as of 2Q20. Fitch anticipates that the company may use these facilities to fund the G3 project. The company has articulated a desire to find a partner to help fund the expansion, but the current economic and political situation is likely to make it considerably more difficult to do so, making debt funding more likely. In the event Methanex resumes G3 spending, Fitch believes the combination of debt funding and near-term cash generation related to pricing pressures will result in funds from operations (FFO)-Adjusted Leverage trending towards 4.5x. The decision not to resume G3 spending would likely be a result of a sustained trough in methanol prices, which could result in lower EBITDA levels and a similar leverage profile to Fitch's Base Case despite the lack of additional debt funding. Pressured FCF Generation Forecasted: Methanex's position as a low-cost producer has allowed it to achieve generally favorable cash generation, with cash outlays often directed toward capital expenditures and a steady dividend. Fitch anticipates pressured FCF generation over the ratings horizon, given the large decline in methanol prices, macroeconomic headwinds and the potential resumption in G3 spending. Management has taken proactive measures to bolster liquidity and FCF generation, including cutting its dividend by approximately $100 million per year and reducing 2020 maintenance capital spending by $30 million. The company will likely wait to resume G3 spending until methanol pricing can support the increased execution risk and tighter liquidity associated with completing the project. G3 Project Delay: Methanex's $1.3 billion-$1.4 billion, 1.8 million MT Geismar 3 (G3) expansion creates short-term risks and longer-term opportunities for the credit. At an estimated $775/MT, the Brownfield G3 project has a number of cost advantages, including shared storage and terminal facilities; lack of need to build a reformer given the ability to use purge gas; procurement synergies, and amortization of other fixed costs over a larger production base. Medium-term credit risks in the event that full project spending is resumed include cost overruns and delays. Fitch notes that the capacity increase associated with the project may serve as a deterrent to the company's competitors who may be considering bringing additional capacity online as methanol prices recover. Energy Applications Drive Price: Methanol prices are volatile, and correlated to oil prices, while methanol's feedstock costs are linked to natural gas and coal prices in Asia. As a result, sharp declines in the oil/gas price ratio can periodically pressure the credit. Methanol demand is increasingly driven by methanol for energy applications, which, prior to the downturn, had been the fastest growing component of demand, and included MTO plants; gasoline blendstocks to increase octane (MTBE); a substitute for bunker fuel and as an industrial boiler fuel. Energy applications for methanol are sensitive to demand in China, particularly MTO, which could cap methanol prices. Low Cost Producer: Methanex is the largest global supplier of methanol, with 8.1 million MT in current production capacity, and sales of 11.0 million MT or about 13% of the methanol market. Natural gas is the main feedstock and is its single largest expense. Methanex's portfolio benefits from low cost/stranded gas. The company's plants outside North America have credit-friendly contract structures, which include a low initial fixed gas price, plus a variable component that is shared between Methanex and the gas supplier as methanol prices rise. This structure is countercyclical insofar as it lowers the company's costs in a down-cycle in exchange for surrendering some methanol price-related gains on the upside. Methanex's North American plants (Geismar 1 & 2, and Medicine Hat, Canada) lack these features but benefit from low gas prices linked to the shale revolution. Derivation Summary Relative to the IG chemical companies, Methanex has exhibited relatively higher cash flow volatility. The company's single product focus on methanol means it is less diversified than integrated chemical producers such as Eastman Chemical Company (NYSE:EMN) (BBB-/Stable) and Westlake Chemical (BBB/Negative), and more in line with certain U.S. Oil and Natural Gas producers like CNX Resources Corporation (BB/Positive) and Antero Resources Corporation (B/Negative). YE 2019 Total Debt with Equity Credit/Operating EBITDA for Methanex was 4.4x, which compares unfavorably to Eastman and Westlake at 2.8x and 2.5x, respectively. Fitch anticipates Methanex's leverage to peak in 2020, declining thereafter. However, this is offset by the company's strong position as the world's largest supplier of methanol, its portfolio of geographically diversified, low-cost plants and a supportive pricing environment. MEOH's margins are in line with IG chemical peers but more cyclical given methanol's linkage to crude and coal pricing, and sensitivity to China's demand for methanol in energy applications. Key Assumptions Fitch's Key Assumptions Within the Agency's Rating Case for the Issuer --Methanol prices trough in 2020-2021, recovering thereafter; --G3 expansion resumes in 2022 - no partner considered for G3; --Delayed draw term loan (DDTL) fully drawn to fund G3; --Share repurchases halted for the duration of the forecast. RATING SENSITIVITIES A revision of the Outlook to Stable could be considered should methanol prices rebound faster than anticipated, potentially reducing the amount of debt funding necessary to complete the G3 expansion and leading to Fitch's expectation of FFO Adjusted Leverage sustainably below 4.5x and/or Total Debt with Equity Credit/Operating EBITDA sustainably below 3.5x. Factors that could, individually or collectively, lead to a positive rating action/upgrade: -- FFO Adjusted Leverage durably below 4.0x, potentially due to finding a beneficial partner to help fund the G3 expansion alongside a faster-than-anticipated recovery in and favorable outlook for methanol prices; -- Increased product diversification. Factors that could, individually or collectively, lead to a negative rating action/downgrade: -- FFO Adjusted Leverage durably above 4.5x and/or Total Debt with equity Credit/Operating EBITDA durably above 3.5x, potentially due to a sustained trough in methanol prices and a lower demand for MTO production; -- Cost overruns, delays, or realization of other execution risk related to G3 expansion leading to stepped up borrowings; -- Sustained disruption in operations of major facilities. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure As of 2Q20, Methanex had $782 million in readily available cash and $727 million in availability between its revolver and its delayed draw term loan, in addition to the liquidity provided by the new notes. The company faces a relative lack of near-term maturities once the 2022 notes are repaid, with a $300 million bond maturity in 2024. Should the company further draw on its delayed draw term loan, it would face a modest maturity wall in 2024, consisting of the unsecured bonds plus the DDTL maturity. Though Methanex enjoys an improved liquidity position following the decision to delay G3 spending, Fitch notes that the decision to resume G3 spending in the near- to medium term will have to be conscious of the potential 2024 maturity wall and may require an extension of the construction loan. In an improved pricing environment, Fitch expects the company would draw on its delayed draw term loan in order to fund the expansion, which would drag on its credit metrics. Date of Relevant Committee 26 March 2020 REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Methanex Corp. ----senior unsecured; Long Term Rating; New Rating; BB Contacts: Primary Rating Analyst Noah Naiditch, Associate Director +1 312 368 3130 Fitch Ratings, Inc. One North Wacker Drive Chicago 60606 Secondary Rating Analyst Mark Sadeghian, CFA Senior Director +1 312 368 2090 Committee Chairperson Dino Kritikos, Senior Director +1 312 368 3150 Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10120170) Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10090792) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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