TEXT-Fitch affirms Solvay at 'A-'; negative outlook
Sept 5 - Fitch Ratings has affirmed Belgium-based Solvay S.A.'s (Solvay) Long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'A-', its Short-term rating at 'F2' and its subordinated hybrid bond at 'BBB'. The Outlook on the Long-term IDR has been revised to Negative from Stable. Simultaneously, the agency has affirmed the senior unsecured rating on Rhodia's outstanding bonds at 'BBB+'. The one-notch differential between Rhodia's and Solvay's senior unsecured ratings reflects the limited operational overlap and legal ties between the companies (see "Parent and Subsidiary Rating Linkage" dated 8 August 2012 at www.fitchratings.com). These ratings will be maintained for the duration of the instruments and as long as Rhodia provides audited financial statements. Solvay's ratings reflect its strong business profile with above-average portfolio, end-market and geographic diversification. These have been enhanced by Rhodia's complementary offering and provide some protection against the inherent demand cyclicality and raw material price volatility of some of the group's more commoditised products. Solvay is the world's leading producer of soda ash, polyamides, specialty surfactants, silica, rare earth systems and generated 40% of its 2011 pro forma sales from emerging markets. In Fitch's view, margins and operating cash flows should exhibit limited volatility through the cycle with EBITDA and EBITDA margin sustained above 15% and EUR2bn, respectively, under the base rating case. The revision of the Outlook to Negative reflects Fitch's opinion that a protracted weakness in market conditions could adversely affect Solvay's ability to restore its debt protection measures back to pre-acquisition levels over the rating horizon. The 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 peers at the same rating level. Under the agency's base case, Fitch calculated free cash flow (FCF) is only marginally positive between 2012 and 2014 and net FFO adjusted leverage gradually reduces from 1.7x (Fitch's calculations). This leaves little headroom versus Fitch's 1.5x negative rating guideline for FFO net leverage through the cycle. However, the agency stresses that its base case assumptions are conservative and offer some upside potential. In particular, limited incremental growth is assumed from Solvay's ongoing capex programme. The forecasts also ignore the remaining targeted savings of EUR345m between H212 and end-2014 from Solvay's Horizon programme and from integration benefits of procurement, logistics and streamlining. In total, the group announced efficiency gains of EUR400m per annum as of from end-2014, of which EUR55m were realised in H112 and a further EUR75m are planned for H212. Finally, Fitch's projections exclude potential milestone payments from Abbott Laboratories Inc. ('A+'/RWN) as agreed at the time of the sale of the pharmaceutical business. Under the 2012 base case, EBITDA is forecast at around EUR2.0bn, slightly below the reported pro forma 2011 EBITDA of EUR2.1bn. This assumes weaker market conditions in H212 than in H112 with intensifying pressure on volumes, prices and margins in the Vinyls and Polyamide Materials segments. EBITDA margin is projected at 15.6%, down from pro forma 16.3% reported for 2011. This also reflects reduced demand for Silica and a drop in Rare Earths prices and volumes from the record levels of 2011. These trends should be partly offset by strong performances in Consumer Chemicals and Acetow & Eco Services and sustained pricing power in Specialty Polymers. From 2012 onwards, the base case assumes a mid-single digit growth in sales and a marginal improvement in EBITDA margin. FCF generation is mildly negative in 2012 and mildly positive in the following years, based on annual capex assumed above historical levels at around EUR0.8bn. Cash requirements include dividend distributions (EUR266m in 2012) and EUR200m in contributions towards the pension obligations. The pension funding gap increased to EUR2.4bn at end-2011 from EUR0.9bn due to the inclusion of Rhodia's net pension liabilities. In line with its methodology, Fitch's treatment of these obligations focuses on their cash implications. Liquidity is expected to remain strong. At June 2012, cash balances amounted to EUR1.5bn and Solvay had access to committed credit lines of EUR550m (maturity 2016) and EUR1bn (2015), and further bilateral credit lines of EUR550m. This compares with short-term debt of EUR471m. WHAT COULD TRIGGER A RATING ACTION? Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Profitability improvements and enhanced cash flow generation resulting in net FFO-based adjusted based leverage sustained below 1.5x through the cycle. Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Net FFO adjusted leverage maintained at or above 1.5x through the cycle, sustained negative free cash flow (FCF) generation and/or through-the-cycle EBITDAR margin below 15% would put pressure on the ratings. Additional information is available on www.fitchratings.com. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, is available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology
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