(The following statement was released by the rating agency)
LONDON, October 08 (Fitch) Fitch Ratings has placed Belgium-based Solvay S.A.'s
(Solvay) ratings, including its 'A+' Long-term Issuer Default Rating (IDR), on
Rating Watch Negative (RWN). This follows the company's announcement that it
plans to acquire US-based specialty chemicals producer Chemlogics. A full list
of ratings is provided at the end of this rating action commentary.
The RWN reflects Fitch's opinion that the USD1.35bn transaction will push
Solvay's debt metrics further away from levels consistent with an 'A-' rating.
The agency expects to resolve the RWN by end-2013 when the transaction is likely
to be completed and believes that the group's post-acquisition credit profile
will be more aligned with a 'BBB+' rating over the next three years. This view
also factors in Fitch's positive view on the acquisition's strategic rationale
and its earnings-enhancing potential, well as Solvay's above-average product
portfolio, and end-market and geographic diversification.
KEY RATING DRIVERS
Deleveraging Progress Reversed
Solvay plans to finance the USD1.35bn transaction with cash and a EUR1bn hybrid
bond with a targeted 50% equity credit. Under our rating case, this would
reverse some of the deleveraging achieved since its 2011 acquisition of Rhodia.
The higher interest cost of a hybrid transaction would also result in slightly
weaker coverage ratios than previously expected. We forecast proforma funds from
operations (FFO) adjusted net leverage at 2.0x for 2013-2014, with limited
deleveraging thereafter. This compares with 1.6x previously projected for
end-2013, and with our negative rating guideline of above 1.5x through the
cycle. Free cash flow (FCF) is expected to be negative in in 2013-2014 on the
back of high capex.
Sound Transaction Rationale
Chemlogics produces specialty chemicals facilitating non-conventional extraction
in the oil & gas industry in the US. Demand growth prospects are strong and
supported by shale gas developments. Chemlogics had sales of USD500m and EBITDA
of USD125m (25% margin) in the last 12 months (LTM). It will be integrated in
Solvay's consumer chemicals segment (Novacare) which reported sales of EUR2.5bn
and EBITDA of EUR467m (18% margin) in LTM-Q213. It will provide further
protection against the inherent demand cyclicality and raw material price
volatility of some of the group's more commoditised products and will offset the
effect of the year-on-year drop in guar gum prices in 2013.
Base Case Assumptions
Proforma EBITDA is forecast at around EUR2 bn in 2013, with Solvay's standalone
EBITDA slightly below 2012's EBITDA (Fitch's calculation). This assumes
continuing weak market conditions in the PVC, polyamide, rare earths and soda
ash segments. It also reflects the impact of reduced prices for guar gum from
the record levels of 2012. These trends should be partly offset by strong
performances in silica, acetow and specialty polymers and by Chemlogics'
contribution. The proforma EBITDA margin is projected at around the 2012 level
of 15%. FCF generation will be negative in 2013-2014 and mildly positive in the
following years, based on annual capex rising above historical levels of around
EUR0.8bn (EUR0.9bn in 2013).
Pension Liabilities Weigh on Metrics
Recurring cash outflows associated with its material pension liabilities weigh
on the group's funds from operations (FFO)-based metrics, which compare
unfavourably with those of similarly-rated peers. The pension funding gap
increased to EUR2.8bn at end-2012, from EUR2.4bn at end-2011 () and from
EUR0.9bn in XX due to the inclusion of Rhodia's net pension liabilities. In line
with its methodology, Fitch's treatment of these obligations focuses on the cash
Positive View on Solvay-Ineors JV
The 50/50 Solvay-Ineos JV announced in September provides an upside to our
rating case. We believe that the transaction will enhance Solvay's business
profile and financial flexibility. The 50/50 JV will combine Ineos's and
Solvay's European PVC assets and limit Solvay's exposure to the ailing European
PVC sector and lift its margins above 15% through the cycle. Solvay will receive
an upfront cash payment of EUR250m upon closing, on an exit value based on a
mid-cycle EBITDA multiple of 5.5x. Closing is expected by end-2013.
Our base assumptions remain conservative and offer further upside potential. In
particular, we assume no gains from synergies between Chemlogics and Solvay's
Novecare business and limited incremental growth from Solvay's ongoing capex
programme. The forecasts also ignore the remaining targeted savings from
Solvay's Horizon programme and from integration benefits of procurement,
logistics and streamlining. In total, the group targets efficiency gains of
EUR400m per annum by end-2014, of which EUR170m were realised in 2012. Finally,
Fitch's projections exclude potential milestone payments from Abbott
Laboratories Inc. (A+/RWN) as agreed at the time of the sale of the
We expect liquidity to remain strong post-transaction. The deal is expected to
be financed with available cash and a EUR1bn hybrid bond. At end-Q213 cash
balances amounted to EUR1.2bn and Solvay had access to committed credit lines of
EUR550m (maturity 2017) and EUR1bn (2015). This is compared with maturing
short-term debt of EUR331m. Aside from the consideration for the acquisition,
cash requirements in 2013 include capex of EUR0.9bn (Fitch's assumption) and
cash dividends of EUR308m paid in H113.
Negative: The ratings would come under pressure if FCF remains consistently
negative and FFO adjusted net leverage is sustained materially above 1.5x
through the cycle. This is the scenario considered under our current base case
and a downgrade would be limited to one notch.
Through-the-cycle EBITDAR margin of below 15%, although not currently envisaged,
would put also pressure on the ratings.
Positive: Profitability improvements and enhanced cash flow generation resulting
in positive FCF and net FFO-based adjusted based leverage being sustained below
1.0x through the cycle would provide rating upside.
FULL LIST OF RATING ACTIONS:
Long-term IDR: 'A-'; placed on RWN
Senior unsecured rating: 'A-'; placed on RWN
Short-term IDR: affirmed at 'F2'
Subordinated hybrid bond rating (50% equity credit): 'BBB'; placed on RWN
Senior unsecured rating on outstanding senior notes: 'BBB+', placed on RWN
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