Investing.com -- On Friday, Fitch Ratings announced a downgrade of the Long-Term Issuer Default Ratings (IDR) of Huntsman (NYSE: HUN ) Corporation and Huntsman International LLC, collectively known as Huntsman, to 'BBB-' from 'BBB'. The downgrade also included Huntsman International LLC's senior unsecured ratings. The Rating Outlook remains Stable.

The downgrade is due to Huntsman's continuing decline in profitability, which is below Fitch's previous expectations. This decrease in profitability is due to lower mid-cycle profitability from lower profitability in Europe and delays in realizing the benefits from recent capital investments. Fitch expects EBITDA leverage to range between 2.5x and 3.0x through the cycle.

Despite the downgrade, Huntsman's 'BBB-' ratings reflect its leading market positions across its main product offerings, solid financial flexibility, and strong liquidity. However, the issuer's high exposure to cyclical construction markets and significant exposure to commodity methylene diphenyl diisocyanate (MDI) limit the ratings.

Fitch expects a gradual improvement in EBITDA leverage to below 3.0x by 2027, which is reflected in the Stable Outlook.

In 2024, Huntsman's revenues and Fitch-defined EBITDA declined by 1% and 4% year over year, respectively, compared to weak 2023 results. Fitch expects gradual improvements in earnings, driven by supportive underlying demand in residential construction in the U.S. and Europe, growth in the aerospace and automotive sectors, recent price increases, and lower raw material costs. However, Huntsman's recovery remains vulnerable to the cyclical nature of construction markets, slower economic growth in China, and high energy costs in Europe.

Huntsman is largely insulated from direct tariff impacts due to its strategy of local production and sourcing of raw materials within the regions it serves. However, demand for Huntsman's products remains susceptible to the cross-sector risk of heightened trade tensions disrupting buyer sentiment and order patterns.

Fitch forecasts a gradual cyclical recovery in EBITDA starting in 2026, with Huntsman's EBITDA leverage profile expected to improve but remain above 3.0x until 2027. The leverage outlook is supported by a manageable debt burden relative to average EBITDA generation, following deleveraging efforts completed by 2021.

Despite modest profitability projected in 2025, Huntsman is expected to maintain solid financial flexibility. This is evidenced by a total liquidity position of approximately $1.7 billion as of Dec. 31, 2024, and Fitch's forecast EBITDA Interest Coverage ratio exceeding 7.0x on average.

Huntsman maintains leading market positions across its sub-industries, supported by a unique global manufacturing footprint. The company is a global leader in MDI-based polyurethanes, a market dominated by a few major players. Huntsman operates three world-scale production facilities in the U.S., the Netherlands, and China. Its competitive market position is further enhanced by access to low-cost feedstocks on the Gulf of Mexico.

Huntsman faces relatively higher commodity price exposure and near-term earnings volatility than some investment-grade chemical peers, due to the component portion of its MDI business and the commoditized nature of part of its performance products segment. Nevertheless, the company is actively reducing its upstream exposure through strategic initiatives, such as the Geismar MDI splitter investment, divesting commoditized businesses, and acquiring differentiated ones.

Huntsman's credit profile is highlighted by robust liquidity and typically solid FCF generation, which Fitch projects will lead to solid financial flexibility through the ratings horizon. The company's high degree of financial flexibility compares similarly against investment-grade peers such as Celanese (NYSE: CE ) Corp. (BBB-/Negative), Albemarle (NYSE: ALB ) Corporation (BBB-/Stable), Olin (NYSE: OLN ) Corporation (BBB-/Stable), and Westlake Corporation (BBB/Stable).

After the sharp decline in earnings seen in recent years, Huntsman's gross leverage position is projected to be above 3.0x in the near term, which compares similarly to Olin and favorably to Celanese and Albemarle, but unfavorably to expectations for Westlake.

Factors that could lead to a negative rating action or downgrade include EBITDA Leverage sustained above 3.0x through the cycle, potentially stemming from prolonged earnings weakness or a more aggressive financial policy; EBITDA margins sustained below 10% and/or neutral FCF through the cycle, potentially due to structural weakness in Europe or failure to realize benefits from capital investments; and a departure from management's public commitment to maintaining investment-grade credit ratings.

Factors that could lead to a positive rating action or upgrade include EBITDA Leverage sustained below 2.3x through the cycle and demonstrated resiliency in EBITDA margins around the mid-teens and consistently strong FCF generation through the cycle.

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