Fitch Ratings has assigned a first-time Long-Term Issuer Default Rating (IDR) of 'BBB-' to Olin Corporation.

Fitch has also assigned a 'BBB-' rating to the company's senior unsecured revolver, senior unsecured term loan, and senior unsecured notes. The Rating Outlook is Stable.

Olin's 'BBB-' IDR reflects the company's leading market positions across its main product lines, competitive cost position, high degree of vertical integration, and strong leverage and cash flow profiles. The rating is constrained by the cyclical and commoditized nature of many of the company's products. While the company's high exposure to the construction and industrial end markets is expected to adversely affect earnings performance in 2023, Fitch expects Olin's EBITDA margins to remain resilient assuming continued successful execution of the company's value optimization operating model.

The Stable Outlook reflects Fitch's expectations for EBITDA leverage to trend between 1.5x and 2.0x through the forecast horizon. While the company retains significant flexibility to shift capital allocation policies, with around $900 million in annual FCF generation through the forecast horizon, Fitch assumes that any leveraging transaction will be followed up with a prioritization toward gross debt reduction back within the company's respective rating tolerances.

Key Rating Drivers

Prudent Operational Model Preserves Margins: Fitch believes Olin's operational strategy focused on value optimization over volume growth makes strategic sense, and is conducive to a more resilient midcycle EBITDA margin profile. Given the historical backdrop of a chlor-alkali industry marred by high price volatility stemming from cyclical demand (primarily in construction and industrial end markets) and an imbalance between the supply/demand fundamentals of chlorine and caustic soda (co-product in chlorine production), Olin is committed to an operational strategy of regularly managing its total market participation based on the prevailing weaker demand profile between chlorine and caustic soda.

Adopted in late 2020, the benefits of this strategy are evidenced by the company's solid EBITDA generation of $555 million (23.9% EBITDA margin) in 3Q22, whereby Olin drastically cut back on chlorine production when caustic soda remained the stronger demand source relative to chlorine. Olin supplements this strategy by purchasing volumes of the relatively 'weaker' product from other market participants, thereby lifting product value and further supporting the respective market. Fitch notes that Olin retains the ability to cut its operating rates across its main production assets to 50%, providing further ability to maximize value and mitigate earnings impacts should demand deteriorate further in 2023.

Market Leading, Vertically Integrated Producer: Olin's Chlor Alkali Products and Vinyls segment is the global leader in chlor-alkali and derivatives production, which provides full integration for the Epoxy segment's epoxy resins, curing agents and intermediates products. The company has identified many integrated outlets for its captive chlorine production. Further supporting the company's low cost position is access to advantaged natural gas liquids-based ethylene feedstocks, through long-term supply agreements with Dow Inc. (BBB+/Positive) in addition to its own power assets.

In the Winchester segment, Olin also holds leading market positions in small calibre ammunition. Of note, the company in 2020 assumed full management and operational control of the Lake City Army Ammunition Plant in Independence, MO, underpinning the stable, mostly recurring revenue attributes of the segment.

Strong FCF Amid Normalizing Earnings: Olin's operating performance is projected to normalize over the near term as cyclical demand deteriorates chlorine and caustic market dynamics, after realizing outsized EBITDA margins and FCF generation due to dramatic increases in pricing from 2H20 through 3Q22. Fitch's forecast points to pricing and volumes declining across the company's Chlor Alkali Products and Vinyls and Epoxy segments through 2023.

Despite the prospects for weakening earnings, Olin is expected to still generate strong FCF of around $900 million annually through the forecast horizon, supported by manageable capex requirements, a modest working capital release in 2023, and resilient EBITDA margins assuming continued successful execution of the company's value optimization operating model.

Improved Leverage: Olin's ratings reflect its EBITDA leverage profile trending between 1.5x-2.0x through the forecast horizon, which compares similarly or favorably to most investment-grade peers. The company's current financial structure demonstrates a marked improvement from historical levels of around 4.0x in EBITDA leverage at YE 2019, achieved through a combination of around $1.3 billion in net debt deduction from 2020 through YTD 3Q 2022 and significant earnings improvement.

With Fitch's expectations for total debt to remain around $2.6 billion over the medium term, Olin's current financial structure is well-positioned to remain within the current 'BBB-' rating tolerances through the forecast horizon, notwithstanding Fitch's expectations for weaker EBITDA generation.

Balanced Capital Deployment: With the company's current leverage and maturity profiles in strong positions, management is expected to pivot capital allocation policies toward a balance between share repurchases, dividends, bolt-on acquisitions, and growth projects over the medium term.

Fitch expects the company to retain flexibility to shift capital allocation between these strategic priorities in changing market conditions, supported by our FCF expectations through the forecast horizon. Fitch assumes that any leveraging transaction will be followed up with a prioritization toward gross debt reduction back within the company's respective rating tolerances.

Derivation Summary

Olin's credit profile is highlighted by an improved EBITDA leverage profile around 1.5x-2.0x and typically strong FCF generation due to its leading market positions and prudent operational strategy, which Fitch projects will lead to solid financial flexibility through the ratings horizon. This leverage/cash flow profile compares favorably against Eastman Chemical Co. (BBB-/Stable), and similarly to Huntsman Corp. (BBB/Stable) and Westlake Corporation (BBB/Positive).

Although Olin posts EBITDA margins that are typically slightly lower than those of all three peers, the company typically generates a FCF margin above 5% in a normalized environment due to manageable capital requirements.

Olin's earnings, as measured by EBTIDA, are historically similar in size to Huntsman and Eastman, and smaller in scale compared to Westlake. While Westlake operates with a similar business profile characterized by leading market positions, and vertical integration within chlor-alkali, Westlake benefits from greater diversification through its building products segment and polyethylene production.

Key Assumptions

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

Declining sales in 2023 driven by lower cyclical demand impacting chlorine and caustic pricing, followed by moderate recoveries thereafter;

Margins normalize towards mid-teens range due to weaker operating leverage, partially offset by benefits from value optimization operating model and parlay strategy;

Continued stability in Winchester segment buoyed by increased military volumes and continued strength in commercial product line;

Capex held around maintenance levels, with no major projects planned;

Dividends around $130 million annually;

Bolt-on acquisition spending accelerates in 2024 assuming normalized market conditions;

Excess cash flow, after term loan amortization, applied to share repurchases.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Gross debt reduction leading to mid-cycle EBITDA Leverage sustained below 1.5x;

Demonstrated commitment to value optimization operating model, evidenced by mid-cycle EBITDA margins sustained in the high teens and lower earnings volatility;

Increased product portfolio diversification.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDA Leverage sustained above 2.0x;

FCF margins consistently in the low single digits, potentially stemming from an inability to pass through costs or migration away from value-optimization model.

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

Robust Liquidity: Olin recently completed a refinancing of its credit facilities in October 2022, in which commitments under its revolver were upsized from $800 million to $1,200 million. Additionally, all guarantees and liens on collateral under the prior senior secured credit facilities were released, and maturities under the revolver and term loan were extended to 2027.

Pro forma for the Oct. 11, 2022 refinancing, the company had approximately $164 million of cash and cash equivalents with nearly full availability under the $1.2 billion senior unsecured revolver. Additionally, Fitch anticipates solid FCF generation averaging around $900 million annually through the forecast, which should further support a robust liquidity profile for the company.

Olin also benefits from a manageable maturity profile, with only around $217 million in debt maturities through 2025.

Issuer Profile

Olin Corporation (NYSE: OLN) is a leading vertically-integrated global manufacturer and distributor of chemical products and a leading U.S. manufacturer of ammunition. The company's operations are concentrated in three business segments: Chlor Alkali Products and Vinyls, Epoxy and Winchester.

Date of Relevant Committee

23 December 2022

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means 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.

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