OREANDA-NEWS. Fitch Ratings has affirmed German chemical group BASF SE's (BASF) Long-term Issuer Default Rating (IDR) at 'A+' and Short-term IDR at 'F1'. The Outlook is Stable. A full list of rating actions is available at the end of this commentary.

The ratings are supported by BASF SE's strong product and geographical diversification, its leading market positions (BASF is in the top three of 75% of its markets), longstanding customer relationships, integrated operating model (Verbund), strong EBITDA margins, sound liquidity and capital structure, and demonstrated access to capital markets.

KEY RATING DRIVERS

Limited Impact of Low Oil Price
We expect the oil and gas segment, which made up 24% of BASF's 2014 EBITDA, to have low earnings in 2015, due to forecast crude oil remaining at an average of USD55/bbl under the Fitch oil price deck, compared with USD99/bbl on average in 2014. European natural gas prices have been more stable and have provided stability to BASF's oil and gas earnings.

The fall in oil earnings has been compensated by higher earnings on the back of a weak euro as well as higher forecast industrial production in the functional materials & solutions and performance products segments. These are speciality segments and as such maintain some price inelasticity. The chemicals division is likely to benefit from cheaper feedstock and a weak euro.

Balanced 1Q15 Performance
The first quarter showed a small 2% yoy decrease in EBITDA, as weak oil and gas earnings margins offset strong natural gas trading sales. EBITDA margins for 1Q15 were on par with the previous year and slightly higher across the chemical segment, leading us to forecast that 2015 financial performance will be similar to 2014's. This includes our forecast of lower EBITDA margins for the agricultural solutions segment for 2H15, following high margins in 1H15.

Leverage at Guidelines
Fitch forecasts BASF to remain at the negative guideline level of 2x FFO (funds from operations) net adjusted leverage over the next few years before deleveraging to 1.7x by 2018, based on management's downwardly revised guidance of EUR4bn capex a year. The forecast high leverage of 2x is partially due to the low crude oil price as well as continuing large amounts of capex, albeit at a lower level than in recent years, mainly focusing on upstream investments within the chemicals business.

Chemical Division Investment Increasing
BASF is undertaking its largest single-plant investment with the planned construction of a methane-to-propylene complex on the US Gulf Coast. The company aims to take advantage of low natural gas prices in the US to secure a competitive cost position. Details of the potential investment are still under evaluation, but Fitch expects that additional capex will be required beyond management guidance of EUR4bn a year on capex. Project funding could come from the divestiture of selected assets and internally generated funds rather than from additional borrowing.

Divestitures and Acquisitions to Continue
BASF has a strong track record of successful divestitures and acquisitions to enhance their strategic focus. Fitch expects the high level of M&A activity to be managed in line with BASF's ratings, particularly given the limited leverage headroom as a result of the continuing large amount of organic capex.

BASF has completed its asset swaps in its oil & gas business Wintershall with Statoil, further increasing its footprint within the North Sea, but has withdrawn from its Gazprom asset swap which will limit BASF's access to cheap Russian feedstock while maintaining a gas trading and storage business. BASF has recently announced it will be withdrawing its gas exploration in Qatar and divesting non-operated Norwegian assets of USD600m, suggesting a more prudent approach to oil and gas assets.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for BASF include:
- Sales volume increases for chemicals, performance products and functional solutions due to weak euro and increased industrial production. The agricultural solutions segment remains stable
-Oil and gas volumes move with the Fitch price deck of USD55/bbl for 2015, USD65/bbl for 2016 and USD80/bbl from 2017
- Margin improvement for chemicals due to cheap feedstock being offset by pricing pressure, and for performance products from 2017 due to restructuring savings
- Net acquisitions over divestitures of EUR500m assumed for 2015 and 2016 and EUR1bn for 2017 and 2018
- 23% tax rate
- Capex in line with management guidance of EUR4bn per year
- Pension contributions of EUR400m a year
- 3% dividend increase per year

RATING SENSITIVITIES

Positive rating action is unlikely as Fitch regards 'A+' as a ceiling for ratings in the chemicals sector due to its inherent cyclicality.

Future developments that could lead to negative rating action include:
- Shareholder-friendly policies or large debt-funded acquisitions that could weaken the group's financial structure and result in a sustained increase in net FFO leverage above 2.0x (end-2014: 2.1x).
-EBITDA margin consistently below 13%, as well as sustained negative free cash flow (FCF).

LIQUIDITY

Liquidity is supported by committed unused credit lines of EUR6bn at FYE14. BASF also had cash balances of EUR1.7bn against short-term borrowings of EUR3.5bn. Fitch expects FCF to remain positive up to 2018. Debt maturities are spread evenly over future years, but with still significant refinancing needed up to 2018. Fitch does not envisage any difficulties with BASF accessing debt markets.

FULL LIST OF RATING ACTIONS

BASF SE
- Long-term IDR: affirmed at 'A+'; Outlook Stable
- Short-term IDR: affirmed at 'F1'
- Senior unsecured debt: affirmed at 'A+'

Ciba Speciality Chemicals
- Senior unsecured debt: affirmed at 'A+'