BASF credit rating downgraded on petchems, plastics exposure and earnings prospects - Moody's

Author: Tom Brown


LONDON (ICIS)--Moody’s has downgraded BASF’s credit rating on the back of its exposure to petrochemicals and plastics markets and projected financial profile into next year, the US agency said on Thursday.

The agency cut the German chemicals major's debt rating from A2 to A3, still investment-grade, stating that company metrics had already been weak for the bracket going into the pandemic crisis.

It added that with the current projections for 2021 margins, BASF would not be in line to maintain the rating into next year.

Debt is likely to stand at 3.7 times (3x) earnings before interest, taxes, depreciation and amortisation (EBITDA), a fall from the projected 4.5x earnings this year, but coming amid an expected shift to negative free cash flow as the company embarks on an aggressive campaign of growth in Asia and expansion in the battery materials sector.

Before coronavirus properly arrived in Europe, BASF chief Martin Brudermuller said that the company expected to spend €23.6bn on growth priorities through to 2024, with €8.2bn of that sum expected to flow into the development of a new China Verbund site in Guangdong that is set to rival its Ludwigshafen, Germany headquarters.

The firmed said 41% of investment spending was projected to be sent on Asia, with another large complex under consideration for Mundra, India, and on developing battery materials production capacity in Schwarzheide, Germany, and Harjavalta, Finland.

The company has not specified how the 2020 economic crash has affected spending plans, but Moody’s projects that the company will record negative cash flow of €1bn this year, expanding to €2bn in 2021 and €2.8bn in 2022 as it enters the peak investment cycle for the Guangdong complex.

The cash flow gap is likely to be funded by the public float and disposal of former oil and gas arm Wintershall, initially expected in mid-2020 but now likely to be delayed into next year due to bearish conditions and oversupply in the sector, Moody’s said.

The decision to cut BASF’s ratings was also driven by its exposure to petrochemicals, intermediates and plastics monomers markets, which account for 36% of its annual sales, with earnings from agriculture, consumer goods and nutrition market products insufficient to offset the weakness in commodity chemicals.

“BASF's exposure to the transportation end market, which includes the automotive sector, ranges between 10%-20%. Moody's does not assume a recovery to 2019 levels in the global automotive market before 2023, which will structurally weigh on BASF,” the agency said in a note.

The company retains strong liquidity reserves after locking down additional credit lines in the early days of European lockdown, with share buybacks ruled out by company management this year despite expectations that strong dividend pay-outs will continue through the pandemic.

Speaking to ICIS, a spokesperson for BASF attributed the decision to the impact and uncertainty brought on by the pandemic, but stated that its ratings remained strong compared to industry peers.

“We have taken note of Moody’s decision, and we will strive to come back to a solid A rating at Moody’s. At S&P and Fitch [the other two large US credit rating agencies], BASF continues to have a solid A rating,” he said.

“Despite the downgrade by one notch at Moody’s, BASF enjoys good credit ratings, especially compared with competitors in the chemical industry.”

Front page picture: BASF executives and Chinese officials commence work for the Verbund complex in Zhanjiang, Guangdong; the project's investments will dent BASF cash flow in coming years
Source: BASF