OREANDA-NEWS. Fitch Ratings has revised Netherlands-based chemicals group Akzo Nobel N.V.'s Outlook to Stable from Negative. It's Long-term Issuer Default Rating (IDR) and senior unsecured ratings have been affirmed at 'BBB+'.

The change in Outlook to Stable reflects the positive impact of restructuring measures restoring credit metrics back in line with that of a 'BBB+' rating. The ratings are underpinned by AkzoNobel's leading global market positions, diversified and strong portfolio, and sound capital structure.

KEY RATING DRIVERS

Improved Financial Performance
The Stable Outlook reflects our view that AkzoNobel now has the ability to sustain credit metrics at levels commensurate with a 'BBB+' rating. Funds from operations (FFO) adjusted net leverage was 2.2x at end-2014, down from 2.4x at end-2013, and 4.0x the year before. For 2015 Fitch assumes a marginal increase in demand in the group's core markets in line with GDP assumptions, and a further improvement in debt metrics through continued deleveraging.

Geographical Diversification, Strong Market Position
The ratings are supported by AkzoNobel's status as a leader in paints and coatings, with a portfolio of strong brands. The ratings reflect its global diversification and strong positions in the global coatings market, as well as in niche speciality chemical products. The ratings are constrained by the cyclicality of AkzoNobel's speciality chemicals and coatings divisions, and exposure to volatile raw material costs.

Fragile Construction Market Recovery
Akzo Nobel faces higher demand-side risk than its chemical peers due to its exposure to fragile housing and construction end-markets in Europe. The impact of current low oil prices may provide some benefits in terms of lower raw material costs, but the impact is expected to be limited with selling prices influenced more by construction markets rather than falling input costs and also due to sales pressure from the industrial end-market segment. Fitch assumes a low single-digit improvement in sales given a mixed global construction demand outlook.

Restructuring to Underpin Profitability
Fitch expects that gains from the group's restructuring measures will offset potential pricing pressure in 2015. Having already reported EBITDA savings of EUR545m at end-2013, a further EUR200m was achieved in 2014. The programme is to an extent winding down, with on-going restructuring costs now expected at around 1% of sales (EUR150m) per year, from 1.8% in 2014 and 2.4% in 2013.

Focus on Deleveraging
Proceeds from the disposal of the US decorative paints and building adhesives businesses in 2013 were used to redeem two bonds due in 2013 and 2014 and reduce net debt to EUR1.6bn at end-2013 from EUR2.4bn a year earlier. This reduced debt and falling average interest cost resulted in a EUR74m reduction in the group's funding costs in 2014. With the restructuring programme coming to an end and expected margin improvements, Fitch is expecting net leverage to reach 1.7x by 2016.

Pension Contributions
Akzo Nobel's pension contributions continue to weigh heavily on cash-flow generation, and partly explain why the company's FFO net leverage ratios compare unfavourably with those of its rated peers. This is in spite of the pension contributions being lower than in the past. Fitch base case assumes top-up payments of EUR330m per year from 2015.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Low-single-digit earnings growth
- EBITDA margins in all divisions improving 1pp as the restructuring programme concludes
- Pension top-ups of EUR330m for 2015-2017
- Acquisitions of EUR100m per year from 2015
- Capex at around 4% of revenue
- 5% yoy increase in dividend from 2016
- Debt reduction from positive free cash flow (FCF)

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating action include:

-Continued significant performance gains from the restructuring programme, with EBITDAR margin approaching 15% (2014: 13%), consistently positive FCF generation and deleveraging to FFO adjusted net leverage around 1.0x

Negative: Future developments that could lead to negative rating action include:
-Sustained FFO adjusted net leverage above 2.0x, negative FCF or an EBITDAR margin consistently below 12%

LIQUIDITY AND DEBT STRUCTURE

At end-2014, available cash balances were EUR1.6bn, and EUR1.8bn was available under a multi-currency revolving facility maturing in 2018. Fitch also forecasts positive FCF of EUR200m-300m over the next two years. This compares with maturing debt of EUR811m in 2015 (EUR621m of which is a 7.25% bond due in March 2015) and EUR320m in 2016. Fitch therefore believes that there is sufficient liquidity for at least 24 months.