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Olin’s Interest Expense Is on the Rise—What Does this Mean?

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Mar. 21 2018, Updated 3:55 p.m. ET

Olin’s interest expenses

As Olin’s (OLN) debt increased, it’s natural for its interest expenses to increase. Although Olin’s debt has declined marginally since 2015, its interest expenses increased for the same period.

The primary reason for the increase in Olin’s interest expense level is the increasing interest rates, as more than half of its debt is at a variable rate.

This trend of increasing interest expenses is expected to continue in 2018—until Olin repays or refinances some of its debt with a lower interest rate. If this trend continues, the next question is whether Olin can manage its interest expenses comfortably. To check this factor, we’ll analyze its interest coverage ratio.

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Olin’s interest coverage ratio

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

Olin’s interest coverage ratio has declined from 9.1x in 2012 to 1.7x at the end of 4Q17. This decline was primarily due to higher interest expenses.

Olin’s EBIT has grown at a slower pace than its interest expenses, resulting in a lower interest coverage ratio. A further deterioration in its interest coverage could slow Olin’s ability to service its debt.

Peer comparisons

Olin’s (OLN) current interest coverage ratio is lower than the industry average of 5.9x. Among Olin’s peers, LyondellBasell (LYB), Westlake Chemical (WLK), and Celanese (CE) have respective interest coverage ratios of 11.1x, 7.9x, and 7.9x. These ratios are well above Olin’s interest coverage ratio and the industry average.

Investors can indirectly hold Olin by considering the iShares US Basic Materials ETF (IYM). IYM invested 0.8% of its portfolio in Olin on March 19, 2018.

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