Eastman Chemical: Debt Servicing Isn’t a Problem

Interest expense

Eastman Chemical’s (EMN) debt, which has decreased since 2015, was reflected in the declining interest expense. Since 2015, Eastman Chemical’s interest expense has fallen ~10% from $263 million to the projected $236 million for fiscal 2018. The company has also refinanced some of its debt. Eastman Chemical replaced notes that carried higher coupon rates with notes that carried lower coupon rates. The company repaid its term loan in 2017, which helped reduce its interest expense.

Eastman Chemical: Debt Servicing Isn’t a Problem

Since Eastman Chemical issued $800 million in new debt, the interest expense could increase marginally despite the expected redemption of the principal outstanding amount of $250 million carrying 5.5% notes due in 2019. However, the new notes’ interest expense will be reflected in the second quarter of 2019. The interest will be paid on a semi-annual basis beginning on June 1, 2019. Eastman Chemical’s interest expense is set to decrease more in the coming quarters.

Interest coverage ratio

The interest coverage ratio tells us how comfortably a company can service its debt. The ratio is calculated by dividing a company’s EBIT (earnings before interest and tax) by its interest expense. The higher the multiple, the better the company’s position.

At the end of the third quarter, Eastman Chemical’s interest coverage ratio stood at 7.0x—compared to the industry average of 7.4x. Westlake Chemical (WLK), Olin (OLN), and LyondellBasell (LYB) have interest coverage ratios of 12.9x, 3.1x, and 21.1x, respectively. Although Eastman Chemical’s interest is lower than a few of its peers, it can efficiently service its debts.

Investors could hold Eastman Chemical indirectly by investing in the First Trust Materials AlphaDEX Fund (FXZ), which invests 3.0% of its portfolio in Eastman Chemical as of November 28.