uploads/2017/12/Part-3-HUNTSMAN-interest-coverage-1.png

Huntsman’s Rising Interest Coverage Ratio Improves Investor Confidence

By

Updated

Huntsman’s interest expense

At the end of 3Q17, Huntsman’s interest expense stood at $134 million as compared to $153 million in 3Q16. Going forward, the interest expense is expected to come down further with the repayment of its term loan B in 2023. The repayment of this debt is expected to reduce the interest expense by $20 million per year. The earlier repayment of debt in 2017 has already reduced interest expenses by $70 million per year. As a result, Huntsman can easily service its debt, which will improve net income and free cash flows.

Huntsman’s interest coverage

The interest coverage ratio indicates how well a company can service its debt. It’s determined by dividing the company’s EBIT (earnings before interest and tax) by its interest expense. The higher the multiple, the better it is for the company.

As Huntsman’s debt has decreased drastically, its interest expense has also fallen. At the end of the first nine months of 2017, HUN’s interest coverage ratio stood at 4.20x, the highest since 2013. The current figure indicates that HUN can easily service its debt. HUN’s interest coverage ratio jumped primarily due to the reduction in interest rates and increased EBIT.

HUN’s peers LyondellBasell (LYB), Eastman Chemical (EMN), and Westlake Chemical (WLK) have interest coverage ratios of 10.0x, 6.30x, and 7.50x, respectively. Thus, HUN has the lowest interest coverage ratio compared to its peer group. However, going forward, the company is expected to continue to reduce interest rate expenses and see improved EBIT.

Investors can indirectly hold Huntsman by investing in the iShares U.S. Basic Materials ETF (IYM), which invests 1.0% of its portfolio in Huntsman as of December 12, 2017.

More From Market Realist