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Capital structure plans benefit DuPont debt holders

| November 2, 2018

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Differing capital structure plans for the three DowDuPont spin-offs create opportunities based on planned debt reduction.

Capital structures of planned spin offs

Subsequent to the merger of Dow Chemical and E.I. du Pont de Nemours on August 31, 2017, management announced its intention to split into three separate public companies: agricultural products, materials science and specialty products. DowDuPont’s solid 3Q18 results were largely overshadowed by the release of the intended capital structures of the three planned public entities. The companies will be split via tax free spin offs to shareholders with the new Dow covering materials science to be the first spin off, expected in April 1, 2019.  Corteva, the agricultural products business, is expected to be spun around June 1, 2019, with the remaining specialty products business becoming the new DuPont.

Exhibit 1: Breakdown of capital structures

Logistics of the Spins

DowDuPont has already filed the initial form 10s for the new Dow and Corteva, and will issue approximately $16 billion of debt prior to the spins.  This debt will be rated based on the pro forma financials of the new Dupont and will be non –recourse to new Dow and Corteva.  Of the roughly $16 billion in proceeds from the debt issuance, $10+ billion will be directed to Corteva to retire the majority of the legacy Dupont debt in order to achieve leverage needed for the targeted A- rating.  Approximately $2 billion of proceeds will go to the new Dow in order to reduce some legacy Dow debt to reach target leverage metrics. DowDuPont would like to keep total debt levels low at the Corteva entity given the seasonal volatility associated with the agriculture business.

 Relative Value 

With the capital structure announcement, we believe that existing Dupont debt and to a lesser extent, Dow debt, will remain better bid given the planned debt reduction.  Essentially all legacy Dupont debt will be repaid, therefore management will likely execute make-wholes in order to take out the debt cleanly.  Given that only $2 billion or so of legacy Dow debt will be repaid, management is more likely to execute a waterfall tender. Based on current trading levels and respective make wholes, we find the Dupont 5.6% 2036; Dupont 4.9% 2041; Dupont 4.15% 2043 bonds attractive.

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