Europe chems debt spree threatens credit ratings – Moody’s

LONDON (ICIS)–Limited organic growth since the 2008 financial crisis prompted European chemicals to pursue growth through mergers and acquisitions (M&A) but the debt-fuelled expansions threaten now corporate credit ratings, the US credit rating agency Moody’s said on Monday.

However, pressure from shareholders to continue expanding revenue and profits will cause companies to pursue M&A transactions which, could come at a cost, said Francois Lauras, vice president and senior credit officer for European chemicals at Moody’s.

“European chemical companies now have little room to pursue new deals over the next 12-18 months without risking downgrades. This comes at a time of limited organic growth prospects for the sector and fierce competition for a reducing number of attractive takeover targets,” said Lauras.

“Most European chemical companies now have limited headroom for further debt-funded M&A, but the pressure to continue acquisitions to boost future revenue and earnings growth is intense as firms struggle to grow organically post-2008.”

The current eurozone’s historic low interest rates may incentivise firms to continue pursuing transactions with debt but this “will inevitably put their current [credit] ratings” at risk.

Due to the size of the transactions, two agrochemicals deals dominated the M&A headlines in 2016 – that of ChemChina proposing to acquire Swiss major Syngenta and that of Germany’s Bayer trying to acquire US’ Monsanto.

Neither transaction has been concluded yet, as they go through antitrust reviews in several jurisdictions, but Moody’s predicts that ChemChina will satisfy European Commission concerns over the Syngenta merger.

Approvals for the Dow-DuPont merger were put on hold by the European Commission in November last year as a probe continues into the potential impact of the deal on the European agricultural sector , but both companies are predicting that it will close in the second quarter of the year.

As the two agrochemicals’ deals are expected to be finalised in 2017, the analysts at Moody’s said specialty chemicals will again be the main target when it comes to European chemicals’ M&A activity

“Recent M&A in the chemical sector has been dominated by agribusiness consolidation and specialty-focused deals. These [large agrochemicals] deals came in response to mounting pressure for further sector consolidation, as companies’ results were hurt by tough conditions in global agricultural markets,” said Moody’s.

“Several diversified chemical companies… have also announced large, transformational acquisitions in the past 18 months, reflecting their ongoing efforts to strengthen their business portfolios and specialty chemical franchises.”

As interest rates stood at historic lows, funding M&A with debt has been easy in the last two years, which prompted companies to pay, on occasions, high prices for the assets purchases, which in the long run would ultimately add another burden to their balance sheets, said the credit rating agency.

“Many of the acquisitions announced in the past two years were valued at relatively high EBITDA [earnings before interest, taxes, depreciation and amortisation] multiples compared with historical levels.

“Buyers  will need to integrate their acquisitions smoothly and realise substantial synergies to help justify the high deal valuations and reduce leverage in a timely fashion.”