Fitch Downgrades Methanex's IDR to 'BBB-'; Outlook Stable

--IDR to 'BBB-' from 'BBB';

--Senior unsecured debt to 'BBB-'from 'BBB';

--Senior unsecured revolver to 'BBB-' from 'BBB'.

The Outlook is Stable.

Methanex's ratings are supported by its size, scale, and low-cost position within the methanol industry; global distribution network; light maturity schedule; and conservative financial management. Ratings concerns center on the company's single product focus; the sizable volume losses experienced at its Chilean plants due to ongoing gas supply disruptions; the potential for higher capex spending linked to accelerated natural gas development in Chile and the construction of Methanex's 1.3 million tonnes per annum (mmtpa) Egyptian methanol plant; and recent sharp declines in global methanol pricing.

Methanex's Chilean plants comprise over half of its total nameplate production capacity. In the first quarter, utilization at these plants averaged just 24% due to the ongoing disruption of natural gas imports from neighboring Argentina. Methanex has supplemented lost volumes with higher levels of purchased and commissioned methanol sales, but margins on these sales are significantly lower than on Methanex's own production. In the current global economic contraction, Methanol pricing has fallen dramatically from the record highs seen in 2008. As of July, posted methanol prices averaged just $214/tonne for the year, versus $606.4/tonne over the same period last year, a 64% decrease. Fitch notes that while demand for methanol in energy applications (30% of demand) has held up well, traditional applications (70% of demand) including formaldehyde, acetic acid, and other chemical derivatives used across a wide range of consumer products, have been significantly affected by the downturn.

Methanex' liquidity is solid. As previously stated, its maturity schedule is light, with only project finance amortizations due in the near term (2009: $14.7 million; 2010: $20.6 million; 2011: $27.1 million) and the next major maturity due is the company's $200 million 8.75% notes in 2012. At March 31, 2009, the company's $250 million unsecured revolver (due June 2010) was undrawn and cash stood at $313 million, providing total liquidity of $563 million. Financial covenants contained in the company's debt structure include a debt-to-capitalization ratio and minimum interest coverage ratio (revolver). The company also has a limitation on secured debt (contained in the revolver and notes outstanding).

Fitch would also note that Methanex's contracts with gas suppliers offer a measure of downside protection for creditors - contracts at several of the company's methanol plants allow Methanex to pay low base natural gas prices but share the upside with natural gas suppliers when methanol prices rise above certain levels. From a creditor perspective, this helps the company by lowering its cost structure under depressed methanol pricing conditions. Supply contracts with this structure include Chile, Trinidad, Egypt, and to a lesser extent, New Zealand.

Credit statistics for Methanex have weakened over the last 12 months (LTM) due to a combination of higher debt levels and the slump in methanol demand and pricing. Note that because Methanex has a controlling interest in the Egypt project, it consolidates 100% of the underlying project debt onto its balance sheet despite holding just a 60% interest in the facility.

As calculated by Fitch, Methanex's debt/EBITDA increased from 0.92x in 2007 to 3.28x at March 31, 2009 (2.71 times [x] adjusting for Egypt debt). Total debt over the same timeframe increased to $832.4 million ($686 million adjusting for Egypt debt), up from $514.9 million at the beginning of 2007. For the LTM ending March 31, 2009, Fitch-calculated EBITDA/gross interest was 4.3x and funds from operations interest coverage was 4.0x, versus 10.5x and 6.3x seen a year earlier.

Methanex's free cash flow was -$259 million versus $32.8 million a year earlier. Adjusting for partner equity contributions on the Egypt project, free cash flow would have been approximately negative $189 million. Fitch anticipates that credit metrics will weaken further as more Egypt related debt is placed on the balance sheet and a soft methanol pricing environment persists. Fitch forecasts that the company will remain free cash flow negative for 2009 and 2010.

At year-end 2008, Methanex's pensions had a funding deficit of $18.2 million versus $22.7 million the year prior. The company's asset retirement obligation was $12 million and was primarily linked to expected site remediation.

Methanex is the world's largest supplier of methanol, with production facilities located in Chile, Trinidad, and New Zealand, as well as a 1.3 mmtpa plant currently under construction in Egypt and expected online in the second quarter of 2010. Total production capacity is 7.2 million tonnes. Sales for 2008 of 6.1 million tonnes constituted approximately 15% of estimated global methanol demand. In addition to produced methanol, the company purchases and distributes methanol from project partners and on the spot market. Methanex maintains a global storage and distribution network, including a fleet of 18 ocean-going vessels.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

Fitch Ratings 
Mark C. Sadeghian, CFA, +1-312-368-2090 (Chicago) 
Sean T. Sexton, CFA, +1-312-368-3130 (Chicago) 
Cindy Stoller, +1-212-908-0526 (Media Relations, New York) 
cindy.stoller@fitchratings.com