S&P: France-Headquartered Chemicals Producer SPCM 'BB+' Ratings Affirmed; Recovery Rating Revised To '3'
We also affirmed our 'BB+' issue ratings on the €550 million senior unsecured notes due 2023 and $250 million due 2022.
At the same time, we revised our recovery rating on the notes to '3' from '4', indicating our expectation of meaningful recovery (50%-70%; upper half of the range).
The affirmation follows our expectation that SPCM's operating performance will remain resilient in 2016 as the company continues to benefit from cheaper raw materials and single-digit volume growth in the majority of its end-markets, despite weaker volumes from the oil and gas sector. We also anticipate that SPCM's credit metrics will remain in line with the rating, with a ratio of S&P Global Ratings-adjusted FFO to debt of about 25%.
We have lowered our assessment of SPCM's liquidity to adequate from strong because, under our base case, SPCM's headroom under financial covenants may weaken to slightly below 30%. This is notwithstanding that the company's available sources of liquidity comfortably cover capital expenditure (capex) and working capital needs.
We revised our recovery rating to '3' from '4' due to our view of the company's resilient EBITDA and margins, leading to higher recovery prospects. The rating is capped at '3' because the notes are unsecured.
Our assessment of SPCM's business risk profile is supported by the company's world market leadership in polyacrylamide polymers, used to treat municipal and industrial water and to alter the viscosity of water injected into tight oil and gas developments. SPCM is the largest producer of polyacrylamides in the world and reported a 45% share of global production capacity at year-end 2015. SPCM's resilience to GDP cyclicality is primarily supported by its exposure to municipal and industrial water treatment end-markets, which should continue exhibiting single-digit expansion even during testing economic conditions and, more fundamentally, by the increasing scarcity of clean water and natural resources.
SPCM's strategy continues to be growth oriented, with planned capacity additions to about 1,000 kilotons (kt) by the end of 2017, up from more than 840kt at year-end 2015. The company currently has two new plants in the U. K. and China in construction phases and anticipates that operations will commence in 2016-2017. In addition, two new sites in Brazil and Russia are in early development stages.
Negative factors affecting SPCM's business risk profile include its limited product diversity in what we view as a niche market, ongoing sizable expansionary capex, and the presence of several competitors, notably in China.
Our assessment of SPCM's financial risk profile factors in the company's focus on growth and subsequent funding needs for capex and working capital but, at the same time, the highly cash generative nature of SPCM's business, with maintenance capex of only €20 million-€30 million and less than 10% of EBITDA. In addition, we recognize the highly flexible and modular nature of SPCM's capex, as well as its track record of prompt capex curtailment if needed.
In our base case, we assume:Mid-single-digit revenue decline, reflecting a decline in prices as a result of the pass through of lower feedstock prices, but offset by modest volume growth due to continued strength in the core water treatment end-markets from which SPCM derived 48% of revenues in 2015. Ongoing capacity expansions, to be partly offset by challenging conditions in the oil and gas sector (19% of 2015 revenues), with fracking and drilling activities in the U. S. still the most affected. Reported EBITDA margins of about 16%-17% in 2016, which is a historically high level, factoring in the benefit of lower propylene prices and the lag between these are passed to customers. Annual capex to support capacity expansion of about €220 million-€230 million in 2016 and about €200 million in 2017. Modest dividend payments, as observed in past years and in line with the company's financial policies. Modest acquisitions. Based on these assumptions, we arrive at the following credit measures:FFO to debt of approximately 24%-25% in 2016 and broadly stable in 2017.Neutral to negative free operating cash flows (FOCF), assuming neutral working capital. In addition, we anticipate that SPCM will report EBITDA of about €340 million-€350 million in 2016, benefiting from margin expansion as a result of lower propylene prices and only partial pass through to customers. However, in line with SPCM's past strategy, we anticipate that all operating cash flow will be utilized to support growth investments as long as opportunities are identified, and hence do not expect any material deleveraging.
The stable outlook reflects our view that SPCM's operating performance will remain resilient in 2016 and that its adjusted FFO-to-debt ratio will be about 25%, which we view as commensurate with our 'BB+' rating. We understand that SPCM plans to reinvest all cash flows into business growth, however, we recognize the modular nature of capex and management's willingness and ability to cut investments in case of unsupportive business conditions.
We could lower the rating if we observe that SPCM's FFO-to-debt ratio has weakened below 25% without clear prospects of recovery, for example, as a result of a decline in EBITDA due to lower sales from the oil and gas industry, higher-than-anticipated capex, or unforeseen acquisitions.
We are unlikely to raise the rating at this stage, reflecting our forecast of neutral to negative FOCF in 2016-2017 as SPCM reinvests a significant proportion of FFO into expansionary capex.