Moody's Keeps Stable Outlook for Dow's Materials-Science Spinoff

Moody's Investors Service is maintaining a stable outlook for the pending materials science spin-off of DowDuPont, expecting that the company will make adjustments to compensate for its lower earnings, caused by a shift of some businesses to another spin-off.

The materials-science company will be about $2.4bn lighter in terms of earnings before interest, tax, depreciation and amortisation (EBITDA), Moody's said in a report. This $2.4bn represents the amount that will be shifted to the specialty products spin-off.

The materials-science company will likely adjust its capital structure accordingly to justify an investment-grade rating of Baa2, Moody's said.

Meanwhile, it should withstand an upcoming ethylene downturn in the future, caused by the new capacity coming on line in North America.

A decline in PE prices and a rise in ethylene costs would cut the spin-off's EBITDA by more than $2.5bn in 2019 from 2017, Moody's said. This decline would be countered by $1.2bn in synergies and growth in the spin-off's other businesses.

Overall, the ethylene downturn should be modest for the materials science spin-off as well as other North American ethylene producers, Moody's said. The US has a cost advantage, and Moody's expects ethylene chain cash margins to remain well above $500/tonne.

Looking at DowDuPont in general, Moody's said the company's synergy targets are reasonable and achievable.

DowDuPont seeks to achieve $3.0bn in cost synergies and $1.0bn in growth synergies, Moody's said. Among these, about $660m will come from procurement. The rest could come from reducing the work force, consolidating buildings and other facilities and shutting down plants as well as other activities.

Based on the track record of the management team, DowDuPont could well exceed its synergy targets, Moody's said.

Materials science is one of the three businesses that DowDuPont will spin off between March 2019 and August 2019. The other two are specialty products and agriculture. Agriculture will likely take the DuPont name, while materials science could take the Dow name.

The specialty products business would have the size, scale and credit quality to merit an investment-grade rating, Moody's said. It will have $21bn in revenue and an EBITDA margin of about 25% spread across four segments that Moody's said are strong and well positioned.