TEXT-S&P rates LyondellBasell subsidiary existing notes 'BB+'
Sept 26 - Overview -- We are assigning a 'BB+' rating to LYB Finance Co. BV's existing $300 million 8.1% senior unsecured notes due 2027. LYB Finance is an indirect wholly-owned subsidiary of petrochemical company LyondellBasell Industries N.V. -- We affirmed all our ratings on LyondellBasell, including the 'BBB-' corporate credit rating. -- We are revising our liquidity assessment to "strong" from "adequate". -- The stable outlook reflects our view that LyondellBasell will maintain an "intermediate" financial risk profile that supports the current corporate credit rating, despite industry cyclicality. Rating Action On Sept. 26, 2012, Standard & Poor's Ratings Services assigned its 'BB+' rating to the existing $300 million 8.1% senior unsecured notes due 2027 issued by LYB Finance Co. BV (formerly Montell Finance Co. B.V.). At the same time, we affirmed all our ratings on LyondellBasell Industries N.V., including the 'BBB-' corporate credit rating. The outlook is stable. Rationale Standard & Poor's Ratings Services' ratings on Netherlands-based LyondellBasell Industries N.V. reflect the company's "fair" business risk profile and "intermediate" financial risk profile. LyondellBasell is a leading global petrochemical producer, with sales totaling more than $50 billion in 2011. Most of its products are cyclical commodities, such as ethylene, propylene, and their derivatives--including various plastic resins used to manufacture a wide variety of durable goods and consumer products. The company also produces automotive and other fuels at a refinery in Houston. The company closed an unprofitable refinery in France earlier this year. We rate the senior unsecured debt of both LyondellBasell (a holding company) and LYB Finance (a finance subsidiary) one notch below the corporate credit rating because we view these obligations as structurally subordinated to liabilities (including accounts payable and postretirement liabilities) at LyondellBasell's operating subsidiaries. Commodity chemicals show high sensitivity to global GDP growth, supply and demand imbalances, and raw material price movements. Despite significant capital intensity, the industry has relatively low barriers-to-entry for many product lines, creating high competition and weak pricing flexibility during periods of excess supply. LyondellBasell has certain business strengths that somewhat mitigate the risks, however. These include the company's large scale of operations, management's focus on operational excellence and cost reduction, and a portfolio of differentiated products (including advanced polyolefins, propylene oxide and derivatives, and catalysts), which are more profitable and stable than its commodity product lines. We expect LyondellBasell to continue to benefit from an improved competitive position and strong operating results during the next several years. This partially stems from the availability of low-cost natural gas in the U.S. However, during the next few quarters, results could moderate somewhat in the face of weaker global economic conditions. Longer-term, we expect earnings to remain highly cyclical, potentially declining sharply if capacity additions exceed demand growth. We think LyondellBasell will focus primarily on moderate-cost projects with high and quick returns. We believe the company will consider larger investments only if management believes the company can maintain credit metrics consistent with the current ratings. On the other hand, in Europe, where LyondellBasell has higher-cost operations, we expect market conditions to remain challenging. However, we believe results there should continue to benefit from a focus on higher-margin downstream products, such as automotive plastics and byproduct sales. LyondellBasell has performed strongly and generated significant cash since emerging from bankruptcy in April 2010 with much more prudent capitalization, a better cost structure, and lower environmental and other liabilities. Since then, it has benefited from a favorable supply and demand balance and an advantaged cost position in the U.S. The company has also reduced debt significantly, lowered borrowing costs, and extended debt maturities. The company remains committed to maintaining at least $3 billion of available liquidity. Profitability varies meaningfully from quarter to quarter, but adjusted trailing-12-month EBITDA margins have exceeded 10% for the past two years, and pretax return on capital is strong, above 20%. We expect EBITDA margins to average in the high-single-digit percentage area, with pretax return on capital averaging in the low- to mid-teen percentage area. Total adjusted debt is $6.1 billion. We adjust debt to include about $1.8 billion of capitalized operating leases and tax-effected unfunded postretirement, asset retirement, and environmental obligations. The company's funds from operations (FFO)-to-total debt ratio is currently about 65%. At the current rating, we expect LyondellBasell to maintain an "intermediate" financial risk profile with FFO-to-debt averaging 40% to 45% and remaining near 30% at cyclical troughs. Private equity firm Apollo Management Holdings L.P. recently reduced its ownership stake in LyondellBasell somewhat to about 27%. Another large shareholder, Access Industries LLC, currently holds about 14%. We believe that ownership by these historically financially aggressive entities is unlikely to result in financial policies that increase leverage or reduce liquidity to levels inconsistent with the current ratings. In addition, LyondellBasell was recently added to the Standard & Poor's 500 Index, which should further diversify the holders of its publicly traded shares. Earlier this year, LyondellBasell increased its regular dividend to an annual rate of about $920 million. The company has sized its regular dividend so that it can continue to pay it without borrowing, even in industry troughs. Therefore, we expect the company to generate excess cash at other times and periodically consider paying special dividends as it did in 2011. We regard ongoing litigation and regulatory matters as modest risk factors. Liquidity We have revised our liquidity assessment to "strong" from "adequate". We base this revision on LyondellBasell's recent entry into a new, currently unused $1 billion three-year accounts receivable program, our expectation that near-term cash flow generation will be stronger than previously expected, and the company's continued adherence to prudent financial policies. We believe that sources of liquidity will exceed uses by 1.5x or more and that sources will exceed uses even if EBITDA drops by 30%. Our assessment of the company's liquidity profile incorporates the following observations and expectations: -- To deal with industry cyclicality and potential spikes in working capital caused by changes in raw material costs, selling prices, and demand patterns, we expect the company to maintain at least $3 billion in cash and available credit under its revolving credit facility and accounts receivable securitization programs. These include a $2 billion revolver maturing in 2017, a $1 billion accounts receivable program maturing in 2015, and a euros 450 million accounts receivable program maturing in 2013. As a result, the company should also be able to absorb high-impact, low-probability events with limited need for refinancing. -- We think operating cash flow will remain more than sufficient to fund average annual capital spending of about $1.5 billion, and common dividends at the current annual rate of $920 million. -- The company has no significant maturities of funded debt until 2019. -- We believe the company has well-established and solid relationships with banks and enjoys a generally high standing in credit markets. Outlook The outlook is stable. LyondellBasell operates in a cyclical industry. Results could weaken somewhat in the coming quarters if global economic conditions deteriorate, particularly in Europe, where LyondellBasell has substantial and higher-cost operations. Longer-term, earnings and cash flow could suffer if supply growth exceeds demand growth. We expect LyondellBasell to maintain ratios appropriate for the rating, including an FFO-to-total debt ratio averaging at least 40% to 45% and remaining near 30% even in industry troughs. We believe the company can maintain a sufficiently strong financial profile to support the rating even if revenues drop by 20% and EBITDA margins decline to 7% from trailing-12-month levels of about 11%. Also key to maintaining the ratings are the continuation of prudent financial policies and sufficient liquidity. We could lower the ratings if there were an unexpected shift in financial policies, such that shareholder returns are more aggressive than we expect or the company pursues very large debt-funded acquisitions or capital investments, even if they are financed off balance sheet. During the next few years, we could consider a slightly higher rating if LyondellBasell improves its business risk profile to "satisfactory" by making investments that promote increased stability and diversification, and the company continues to perform strongly and maintain prudent financial policies. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Key Credit Factors: Criteria For Rating Companies In The Global Commodity Chemicals Industry, Sept. 19, 2012 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed LyondellBasell Industries N.V. Corporate credit rating BBB-/Stable/-- LyondellBasell Industries N.V. Senior unsecured BB+ New Rating LYB Finance Co. B.V. $300 mil. 8.1% senior unsecured notes due 2027 BB+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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