Fitch Assigns Initial 'BBB-' IDR to Albemarle Corp.; Outlook Stable

Fitch Ratings has assigned Albemarle Corporation (NYSE: ALB, Albemarle) an initial Issuer Default Rating (IDR) of 'BBB-'. Roughly $4.4 billion of debt and commitments are affected by this action. A complete list of rating actions follows at the end of this release.

The Rating Outlook is Stable.

Albemarle's ratings reflect the company's leading market position in bromine, lithium, refining catalysts, and surface treatment chemicals which generate high margins and strong cash flow. The ratings also reflect high initial leverage following the January 2015 acquisition of Rockwood Holdings, Inc. and Fitch's expectation that asset sales and free cash flow will be applied to debt reduction lowering leverage below 3x by the end of 2018.

KEY RATING DRIVERS

OLIGOPOLISTIC MARKETS

The markets for bromine and lithium are highly concentrated and Albemarle is a key player benefiting from low cost production and pricing power. The company is the second largest bromine producer after Israel Chemicals Ltd. and the second largest lithium producer after Sociedad Quimica y Minera de Chile S.A. (SQM). As filed in the SEC form 8K dated April 13, 2015, adjusted EBITDA was $225 million with a 28% margin and $180 with a 38% margin for bromine and lithium, respectively in 2014.

FAVORABLE GROWTH TRENDS

Growth in catalysts should benefit longer-term from rising fuel consumption and more stringent air quality mandates. Fluid catalytic cracking (FCC) catalysts are associated with heavy oil upgrading and demand should benefit by the trend toward heavier fuel overtime. Growth in lithium should benefit from growth in fuel storage applications including for consumer electronics, electric vehicles and grid storage. Bromine is expected to benefit from use in mercury control at power generators longer term. Surface treatment products should grow with aerospace and automotive production.

LARGE COMPETITORS IN CATALYSTS

While the company has strong niche positions in refining catalysts and polymer catalysts, competitors include Shell, Chevron, and BASF.

EXPOSURE TO HYDROCARBON DRILLING

Demand for bromine for drilling completion fluids slowed in the fourth quarter of 2014 and first quarter of 2015 as a result of lower offshore drilling activity driven by the sharp decline in oil prices. Beyond 2015, this activity should stabilize and resume solid growth.

EXPECTATIONS

Fitch expects operating EBITDA of about $900 million for 2015 reducing in 2016 to the degree that assets are sold. Fitch expects annual free cash flow beyond 2015 to be on the order of $400 million. Fitch expects management to repay debt with free cash flow generation but believes leverage could remain above target until 2018.

KEY ASSUMPTIONS

--Asset sales of businesses with aggregate 2014 adjusted EBITDA of $100 million are sold for an average multiple of 6x in 2016;

--Aggregate sales growth of 3% per annum generally on a pro forma combined basis;

--Pre-synergy margins consistent with historical pro forma combined margins;

--Anticipated synergies at 100% and 85% of management's expectations in 2015 and 2016, respectively;

--Excess cash flow applied to debt reduction.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action are not expected over the next 18 months but include:

--Total debt to operating EBITDA sustainably below 2x.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Failure to make substantial progress toward de-levering over the next 18 months;

--Expectations of total debt/EBITDA above 4x at the end of 2016;

--Failure to generate positive free cash flow in 2015 and expectations that free cash flow would be below $400 million in 2016 without some combination of additional asset sales or equity raising.

LIQUIDITY AND DEBT STRUCTURE

On Jan. 12, 2015, Albemarle completed the acquisition of Rockwood Holdings, Inc. for a purchase price of approximately $5.7 billion comprised of approximately $3.6 billion in cash and approximately $2 billion in equity. Albemarle assumed the $1.25 billion notes issued by Rockwood Specialties Group, Inc. Albemarle guarantees the notes and Rockwood Specialties and Rockwood Holdings guarantee Albemarle notes and credit facilities. At March 31, 2015, total debt was $4 billion compared to pro forma adjusted LTM EBITDA of $959 million at 4.2x. Albemarle is in the market to sell non-core assets with aggregate EBITDA of $100 million and proceeds earmarked to reduce debt. The company expects net debt/adjusted EBITDA of around 4x at the end of 2015, targets 2.5x by the end of 2017 and has suspended its share repurchase program until leverage reaches that level.

SUFFICIENT LIQUIDITY

At March 31, 2015, Albemarle had $261.4 million of cash on hand, of which, $255.6 million was held by foreign subsidiaries. Deferred tax liabilities of $97.1 million relate to the expected future repatriation of prior period earnings of Rockwood that are planned to be repatriated in 2015. The company has a $1 billion revolving credit to support its commercial paper program and for general corporate purposes. The facility expires in Feb. 2019 and availability is reduced by outstanding commercial paper ($462 million as of March 31, 2015 classified as current portion of long term debt). The leverage covenant is 4.50x for 2015 and then steps down by 0.25 on a quarterly basis thereafter until reaching 3.50x. Availability under the revolver and commercial paper program was $538 million at March 31, 2015. Fitch expects the company to be modestly free cash flow positive in 2015 after capital expenditures of $225 million and common dividends of $119 million. Albemarle guides to capital expenditures of 4-6% of revenues with 2015 expected to be slightly over 6%.

Annual maturities of debt over the next five years are $471.2 million in 2015 (commercial paper of $462 million), $3.9 million in each of 2016 and 2017, $3 million in 2018, and $358.4 million in 2019.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings:

Albemarle Corporation

--Long-term IDR 'BBB-';

--Short-term IDR 'F3';

--Commercial Paper 'F3';

--Senior unsecured credit facility 'BBB-';

--Senior unsecured notes 'BBB-'.

Rockwood Specialties Group, Inc.

--Senior unsecured notes 'BBB-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985557

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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