S&P: Lanxess AG Outlook Revised To Negative On Announced Acquisition; 'BBB-' Ratings Affirmed
OREANDA-NEWS. S&P Global Ratings said today that it revised its outlook on Lanxess AG to negative from positive. At the same time, we affirmed our 'BBB-' long-term issuer credit rating and issue-level ratings on the company. Earlier today, Lanxess announced its intention to acquire Chemtura Corp., a U. S.-based producer of lubricant additives and flame retardants, urethanes, and organometallics with EBITDA of about €250 million. Lanxess is planning to close the transaction by mid-2017. The company will finance the transaction with €1.0 billion to €1.25 billion of senior notes, a €500 million-€750 million hybrid bond that we assume will receive 50% equity credit, and available cash on its balance sheet. The affirmation reflects our view that there was a material cushion in the rating after the company's €1.2 billion payment from Saudi Aramco in April 2016 for the share in Arlanxeo JV. The rating also reflects our view of company's financial policy commitment and expectation that Lanxess will be able to reduce leverage in the couple of years following the transaction. We view the transaction as positive for Lanxess' business profile, as it will help to increase its diversity and scope, raise the exposure to lucrative additives market and overall specialty chemicals, and strengthen its footprint in the key North American market. The market for industrial lubricant additives is highly fragmented, with only one major player, Lubrizol. This will make Lanxess the second-largest player in the industry post-transaction and will widen the company's product profile over the value chain from chemical intermediates toward finished fluids. In the market for flame retardants, Lanxess will advance to a Number 3 position behind ICL and Albemarle Corp., adding brominated flame retardants to the phosphorus-based ones it already produces. It will integrate the two smaller segments into its other business units. Lanxess' margins should also improve, as Chemtura's margins are currently stronger, and the combination should create significant synergies. We expect Lanxess' leverage to increase as a result of the acquisition, with a funds from operations (FFO) to debt ratio of about 25% in 2017 (pro forma full-year contribution of the target) and improving to just below 30% in 2018 on the back of strong free operating cash flow (FOCF) generation and a gradual increase in EBITDA. We therefore lowered our financial risk profile assessment to significant from intermediate. However, we continue to factor in the company's commitment to maintaining an investment-grade rating and the flexibility it might have to lower capex or to dispose of some businesses to strengthen its balance sheet. Our base case assumes:Proportionate consolidation of the Arlanxeo joint venture and continued bottom-of-the-cycle conditions in this segment, only partly offset by restructuring measures. Moderate EBITDA growth in the Performance Chemicals and Advanced Intermediates segments. Capex of €500 million-€600 million on a combined basis. No share buybacks or further acquisitions. Based on these assumptions, we arrive at the following credit measures:FFO to debt of about 25% in 2017 (including the pro forma full-year contribution of Chemtura) and just below 30% in 2018 andFOCF of about €100 million in 2017 and about €300 million or higher in 2018. The negative outlook reflects our expectation that company's FFO-to-debt ratio will be below the 30%, which we consider commensurate with the current rating under the current supportive market conditions, and that the deleveraging that we anticipate in our base case scenario is dependent on successful integration of the acquired business and a continued supportive chemical industry environment. We might lower the rating if we were to believe that company will not be able to reach an FFO-to-debt ratio of about 30% by 2018 and FOCF doesn't improve to about €300 million. We could also consider a downgrade if the company doesn't take offsetting measures in line with its public commitment to the investment-grade rating in case of an unforeseen deterioration in the market or competitive environment. We will consider revising the outlook to stable if Lanxess were to increase FFO to debt to about 30% and strengthen its FOCF generation as a result of the successful integration of Chemtura.