After Albemarle (NYSE:ALB) recently announced its intent to offer $1.75 billion of convertible preferred equity, analysts at KeyBanc Capital Markets said it was necessary to rule out a credit downgrade.
The firm, which lowered its price target for the Buy-rated stock to $159 from $17, explained in a note this week that the transaction would help ensure ALB's investment-grade credit rating, which may have been in question.
"In an adverse scenario, ALB's net leverage could have reached 4.5-5.0x at year-end without additional capital," wrote KeyBanc. "The issuance of preferred equity was a surprise to us and most investors, but we believe it was necessary to rule out a credit downgrade, which management prefers
to avoid."
"Management's more conservative approach to the balance sheet has the obvious downside of the unexpected dilution and additional interest expense," they added.
However, KeyBanc notes that in ALB management's eyes, its market cap will be larger in three years when conversion occurs, making the ultimate dilution lower.
"One potential upside of the preferred equity issuance is that in case cash generation/Li price surprise to the upside ALB could use its overcapitalized balance sheet for acquisitions at the bottom of the cycle," added KeyBanc.