Europe leveraged chems firms well placed - Fitch

08 October 2008 15:57  [Source: ICIS news]

LONDON (ICIS news)--Most European leveraged chemicals firms are relatively well-placed to endure difficult trading conditions but may face refinancing risk in the longer-term, ratings agency Fitch said on Thursday.

"The chemicals sector has to operate in difficult trading conditions, which have led to significant under-performances against plan of up to 20-25% in some cases," said Oliver Kroemker, an associate director in Fitch's industrials group.

"Nonetheless, most players have so far been broadly in line with Fitch's more conservative forecast assumptions and there remains a modest degree of cash flow flexibility," he added.

The ratings agency said that leveraged chemicals borrowers had been experiencing raw material price volatility and that further supply-driven cyclical effects were anticipated.

Margins have eroded as a result of inflexible contracts and the inability to pass on costs to sales prices, despite relatively high production capacity utilisation, said Fitch.

In response, chemical companies with commodity-like offerings have been seeking to customise more products to protect their margins. Specialty chemicals producers have been diversifying away from mature geographies and end-markets such as consumer products, construction, automotive, printing, and plastics and packaging, the ratings agency added.

The possibility of a major economic downturn could put further pressure on credit profiles.

"Leveraged chemical borrowers have built up reasonable liquidity reserves in the form of cash balances and available committed revolving credit lines, which should cover their funding needs through this difficult period," said Matthias Volkmer, a director in Fitch's European leveraged finance group.

"They also benefit from the refinancing exercises in 2006 and 2007 that extended maturities of their LBO [leveraged buyout] debt until 2013 and beyond," he added.

However, projected cash flows would be insufficient to meet maturing debt obligations and leveraged chemical borrowers may be subject to refinancing risk in the longer-term, Fitch added.

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By: Hilde Ovrebekk
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