Synthetic rubber to continue to hit LANXESS, debt downgraded - Fitch

18 August 2014 16:22 Source:ICIS News

LONDON (ICIS)--Rating agency Fitch downgraded on Monday Germany’s LANXESS’ debt qualification from BBB to BBB- on the back of the “prolonged downturn in the synthetic rubber sector” and overcapacity in some of the company’s core markets.

The BBB- rating has an stable outlook. However, low butadiene (BD) prices observed during 2014 and the weaker demand registered in high growth markets will make LANXESS' synthetic rubber division suffer, said the rating agency.

“The downgrade reflects our view that the prolonged downturn in the synthetic rubber sector has re-based LANXESS ' profitability below historical levels, and that in the context of structural overcapacity in some of its core markets, future improvements in the group's performance are highly contingent on the success of its restructuring programme,” said Fitch.

The rating agency was referring to LANXESS’ consolidation programme of several business units, effective from January 2015 and announced on 6 August.

Fitch added LANXESS will face in the coming years weak credit metrics while it tries to rationalise its structure, while having high investment commitments for the rest of 2014 and 2015.

“The 'BBB-' rating and Stable Outlook are underpinned by the actions taken to date to strengthen the balance sheet, with a capital issue of €430m in May, and to address the operational weaknesses identified. In our view, the execution risk on the restructuring programme is mitigated by the track record and strong credentials of the management team,” said Fitch.

LANXESS will also face the challenge of overcapacity and competitive pressures, particularly in ethylene propylene diene monomer (EPDM) and butyl rubber markets, said Fitch, which added the price volatility of these products leaves the company “heavily exposed” to the demand pressures which are likely to affect this market in the near to medium term.

“Strong performances in Advanced Intermediates and Performance Chemicals should continue to support profitability, in line with 1H14 [first half of 2014] results, although we expect a slight sequential drop in margins in 2H14 due to maintenance shutdowns and seasonality,” said Fitch.

On LANXESS’ balance sheet, Fitch expects earnings before interest, taxes, depreciation and amortisation (EBITDA) in 2014 to stand at €815m, in the top range of the company’s guidance between €780m-820m guidance.

However, the rating agency expects free cash flow (FCF) to remain negative in 2014 and 2015 on the back of completion of large projects in EPDM and neodymium polybutadiene rubber, which will take the company’s capital expenditure (capex) to €650m in 2014.

“From 2016 onwards, cash flow generation should be aided by the ramp up of the new plants, gains from restructuring measures, improved capacity utilisations and lower capex. We forecast a margin improvement to 10%-11%, which remains below historical levels,” said Fitch.

US-based rating agency Fitch rates corporations’ debt from the AAA level (with the highest credit quality) to D (default). LANXESS’ BBB- would still represent ‘Good credit quality’, although one notch lower (BB) would already be considered ‘Speculative’, i.e. non fit for investment purposes.

By Jonathan Lopez