Fitch Affirms NewMarket Corp.'s Ratings at 'BBB'; Outlook Stable

NewMarket

09/12/2019 16:16

(The following statement was released by the rating agency)


Fitch Ratings-Chicago-December 09: 

Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of 
NewMarket Corporation (NYSE: NEU) at 'BBB'. Fitch has also affirmed the 
company's senior unsecured notes and revolving credit facility at 'BBB'. The 
Rating Outlook is Stable.

NewMarket's 'BBB' IDR is supported by its stable earnings profile, consistently 
strong FCF generation, and conservative capital deployment strategy. Fitch 
believes that the company has the financial flexibility and discipline to absorb 
any potential periods of compressed margins related to input costs or 
overcapacity. While rising penetration of electric vehicles (EVs) may mean that 
some petroleum additives - primarily fuel additives - will be used in declining 
proportions of vehicles, Fitch views the risk as minimal through the ratings 
horizon and notes that the company will have ample time to position its 
offerings to accommodate this trend.

Key Rating Drivers

Stable Earnings Profile: NewMarket Corporation is one of four large producers of 
petroleum additives. The company benefits from barriers to entry formed by close 
customer relationships, lengthy qualification processes and the high cost of 
product failure. Industry volumes tend to grow in line with GDP and are 
influenced by factors such as fleet size and the push toward lower emissions and 
more fuel-efficient vehicles. Margins tend to expand when oil prices fall and 
contract when oil prices rise, owing to a three to six month lag in between 
changes in oil prices and NewMarket's ability to pass through costs to 
customers. Fitch notes that NewMarket will benefit in Asia from its Singapore 
plant becoming fully operational, which allows the company to access the growing 
Asian markets.

Strong FCF Generation: NewMarket's EBITDA margins of about 18%-20% paired with 
modest dividends and manageable capital expenditures should enable the company 
to generate solidly positive annual FCF. As margin pressures continue to ease, 
FCF generation has increased and should remain substantial. FCF generation is 
further bolstered by lower capex following the completed construction of the 
company's plant in Singapore. Fitch notes that NewMarket had no issues 
self-funding the build-out, even as margins began to be pressured in the 
beginning of 2018. Fitch believes the company will be able to more than 
comfortably fund the significantly dialled back capex of around $70 million on 
average.

Conservative Capital Structure: Fitch expects NewMarket's total debt with equity 
credit/operating EBITDA remain steady at or slightly below 1.5x through the 
ratings horizon. The company has historically maintained a very conservative 
balance sheet and has not seen its leverage ratio trend durably above 1.5x for a 
number of years. Even as the company potentially re-tools in the long-term to 
address increasing electric vehicle penetration, Fitch believes that the 
NewMarket will remain disciplined in its MA strategy. The company's AMSA 
purchase highlights this philosophy, as the transaction allowed NewMarket to 
acquire a valuable, long sought after target that strengthens and expands its 
market position within Latin America while adding relatively little additional 
debt to its balance sheet, preserving its strong credit profile. Fitch expects 
NewMarket will take a similar balanced approach to any future MA activity or 
other such capital allocation decisions. 

Lack of Diversification: While NewMarket is a leader in petroleum additives, it 
is fully exposed to the health of the industry. Sustained increases in oil 
prices (as was the case through 2018) can cause margins to contract. As a 
result, the company is particularly exposed to industry-level risk related to 
regulation or broad changes in consumer behavior. The market has remained very 
stable over the last several years, but a change in dynamics could lead to 
pressure on NewMarket's business profile.

Increasing Electric Vehicle Penetration: Fitch views the continued adoption of 
electric vehicles as a long-term threat to NewMarket's petroleum based 
additives; however, it is unlikely to affect NewMarket's credit profile 
throughout the ratings horizon. Fitch believes that the global regulatory push 
towards less pollutant transportation methods as well as general consumer 
preference for more fuel efficient vehicles will drive considerable growth in 
the sale of EV's over the next several years. Even so, it is likely to take at 
least close to a decade for there to be any material turnover in car parc, 
particularly in the U.S., where Fitch understands the average age of a light 
motor vehicle to be close to 12 years. In the long-term, a re-tooling of the 
product portfolio to increase exposure to commercial heavy duty vehicles, 
heating  cooling products for electric vehicles, and the introduction of 
transmission fluid for multi-speed transmission electric vehicles can help the 
company mitigate this risk.

Derivation Summary

NewMarket's ratings reflect its stable earnings profile, high EBITDA margins and 
strong FCF generation. Credit risks include lack of diversification/size and the 
trend toward electric vehicles, which presents a long-term threat for the 
company's products; however, Fitch views the risk from electric vehicle adoption 
as minimal through the ratings horizon. The company has materially lower total 
debt with equity credit/operating EBITDA than the bulk of 'BBB' category peers, 
offset by a relatively narrow set of products Westlake Chemical Corporation 
(BBB/Stable) offers relatively more commoditized products with a slightly weaker 
balance sheet, but operates with a degree of vertical integration and product 
diversification that shields them from much of the cash flow risk which 
characterizes NewMarket's products. NewMarket's relatively more narrow product 
portfolio and lack of vertical integration therefore serve as a headwind to 
positive ratings momentum, while its comparatively strong balance sheet gives 
the company a solid financial cushion at the 'BBB' level.

Key Assumptions

Fitch's Key Assumptions Within the Rating Case for the Issuer

- Sales growth in low single digits, driven in part by volume growth in Asia 
following the completion of the Singapore plant, offset partially by falling oil 
prices; 

- Initial margin expansion to 19.6% as a sharp drop in oil prices allows for 
temporarily elevated profitability, followed by a normalized trend toward 18%;

- Annual capex of around $70 million - MA, while possible, is not assumed;

- Total debt with equity credit/operating EBITDA around 1.4x, FFO adjusted 
leverage of around 2.3x.

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating 
Action

- Additional scale and diversification, particularly in products insulated from 
the trend in EVs;

- Commitment to operating with total debt with equity credit/operating EBITDA 
durably below 1.5x and/or FFO adjusted leverage durably below 2.0x.

Developments That May, Individually or Collectively, Lead to Negative Rating 
Action

- Significant industry capacity additions leading to overcapacity which would 
weigh on operating margins, potentially leading to total debt with equity 
credit/operating EBITDA durably above 2.5x and/or FFO adjusted leverage durably 
above 3.0x;

- More aggressive than anticipated capital deployment policy, leading to 
heightened execution risk on MA and capital spending projects.

Liquidity and Debt Structure

NewMarket has a clean capital structure with an $850 million unsecured revolving 
credit facility and senior unsecured notes totaling $600 million with the first 
maturities in 2022. Fitch believes that FCF generation and the revolver, which 
is largely undrawn, will provide ample liquidity through the ratings horizon. As 
of Sept. 30, 2019, Fitch estimates that NewMarket's total liquidity is $885 
million consisting of $805 million of revolver availability and $80 million 
Fitch-defined readily cash.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3 - ESG issues are credit neutral or have only a minimal 
credit impact on the entity, either due to their nature or the way in which they 
are being managed by the entity. 

For more information on Fitch's ESG Relevance Scores, visit 
www.fitchratings.com/esg. 

NewMarket Corporation; Long Term Issuer Default Rating; Affirmed; BBB; RO:Sta

----senior unsecured; Long Term Rating; Affirmed; BBB

Contacts: 

Primary Rating Analyst

Noah Naiditch, 

Senior Analyst

+1 312 368 3130

Fitch Ratings, Inc.

One North Wacker Drive 

Chicago 60602

Secondary Rating Analyst

Patrick Hughes, 

Associate Director

+1 312 368 5456

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. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019)

https://www.fitchratings.com/site/re/10090792

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10104265

Solicitation Status 

https://www.fitchratings.com/site/pr/10104265#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING 
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 
PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, 
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF 
CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE 
AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE 
PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD 
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED 
IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS 
ISSUER ON THE FITCH WEBSITE.

Copyright © 2019 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its 
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, 
(212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or 
in part is prohibited except by permission. All rights reserved. In issuing and 
maintaining its ratings and in making other reports (including forecast 
information), Fitch relies on factual information it receives from issuers and 
underwriters and from other sources Fitch believes to be credible. Fitch 
conducts a reasonable investigation of the factual information relied upon by it 
in accordance with its ratings methodology, and obtains reasonable verification 
of that information from independent sources, to the extent such sources are 
available for a given security or in a given jurisdiction. The manner of Fitch's 
factual investigation and the scope of the third-party verification it obtains 
will vary depending on the nature of the rated security and its issuer, the 
requirements and practices in the jurisdiction in which the rated security is 
offered and sold and/or the issuer is located, the availability and nature of 
relevant public information, access to the management of the issuer and its 
advisers, the availability of pre-existing third-party verifications such as 
audit reports, agreed-upon procedures letters, appraisals, actuarial reports, 
engineering reports, legal opinions and other reports provided by third parties, 
the availability of independent and competent third- party verification sources 
with respect to the particular security or in the particular jurisdiction of the 
issuer, and a variety of other factors. Users of Fitch's ratings and reports 
should understand that neither an enhanced factual investigation nor any 
third-party verification can ensure that all of the information Fitch relies on 
in connection with a rating or a report will be accurate and complete. 
Ultimately, the issuer and its advisers are responsible for the accuracy of the 
information they provide to Fitch and to the market in offering documents and 
other reports. In issuing its ratings and its reports, Fitch must rely on the 
work of experts, including independent auditors with respect to financial 
statements and attorneys with respect to legal and tax matters. Further, ratings 
and forecasts of financial and other information are inherently forward-looking 
and embody assumptions and predictions about future events that by their nature 
cannot be verified as facts. As a result, despite any verification of current 
facts, ratings and forecasts can be affected by future events or conditions that 
were not anticipated at the time a rating or forecast was issued or affirmed. 

The information in this report is provided "as is" without any representation or 
warranty of any kind, and Fitch does not represent or warrant that the report or 
any of its contents will meet any of the requirements of a recipient of the 
report. A Fitch rating is an opinion as to the creditworthiness of a security. 
This opinion and reports made by Fitch are based on established criteria and 
methodologies that Fitch is continuously evaluating and updating. Therefore, 
ratings and reports are the collective work product of Fitch and no individual, 
or group of individuals, is solely responsible for a rating or   a report. The 
rating does not address the risk of loss due to risks other than credit risk, 
unless such risk is specifically mentioned. Fitch is not engaged in the offer or 
sale of any security. All Fitch reports have shared authorship. Individuals 
identified in a Fitch report were involved in, but are not solely responsible 
for, the opinions stated therein. The individuals are named for contact purposes 
only. A report providing a Fitch rating is neither a prospectus nor a substitute 
for the information assembled, verified and presented to investors by the issuer 
and its agents in connection with the sale of the securities. Ratings may be 
changed or withdrawn at any time for any reason in the sole discretion of Fitch. 
Fitch does not provide investment advice of any sort. Ratings are not a 
recommendation to buy, sell, or hold any security. Ratings do not comment on the 
adequacy of market price, the suitability of any security for a particular 
investor, or the tax-exempt nature or taxability of payments made in respect to 
any security. Fitch receives fees from issuers, insurers, guarantors, other 
obligors, and underwriters for rating securities. Such fees generally vary from 
US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In 
certain cases, Fitch will rate all or a number of issues issued by a particular 
issuer, or insured or guaranteed by a particular insurer or guarantor, for a 
single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 
(or the applicable currency equivalent). The assignment, publication, or 
dissemination of a rating by Fitch shall not constitute a consent by Fitch to 
use its name as an expert in connection with any registration statement filed 
under the United States securities laws, the Financial Services and Markets Act 
of 2000 of the United Kingdom, or the securities laws of any particular 
jurisdiction. Due to the relative efficiency of electronic publishing and 
distribution, Fitch research may be available to electronic subscribers up to 
three days earlier than to print subscribers. 

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd 
holds an Australian financial services license (AFS license no. 337123) which 
authorizes it to provide credit ratings to wholesale clients only. Credit 
ratings information published by Fitch is not intended to be used by persons who 
are retail clients within the meaning of the Corporations Act 2001

Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange 
Commission as a Nationally Recognized Statistical Rating Organization (the 
"NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on 
Item 3 of Form NRSRO and as such are authorized to issue credit ratings on 
behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other 
credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and 
therefore credit ratings issued by those subsidiaries are not issued on behalf 
of the NRSRO. However, non-NRSRO personnel may participate in determining credit 
ratings issued by or on behalf of the NRSRO