TEXT-S&P summary: Holcim Ltd.
The short-term rating is 'A-2'. We assess Holcim's liquidity as "strong" under our criteria, reflecting our assumption that sources will cover uses by more than 1.5x in 2013 and 1.0x 2014.
On Sept. 30, 2012, we estimate Holcim had access to liquidity sources of CHF2.5 billion in reported cash and about CHF4.9 billion in undrawn committed lines, of which about CHF4.6 billion is available beyond one year. In December 2011, Holcim refinanced its $3.5 billion facility with a EUR2 billion syndicated loan maturing in 2016.
We estimate that the group's liquidity position covers short-term debt, as well as intrayear working capital fluctuations. We think that discretionary cash flow could decrease noticeably in 2013 as we believe spending on expansion programs could pick up (from the about CHF1.1 billion we estimate for 2012). Assuming outstanding undrawn lines are not renewed--which is, in our view, unlikely to occur--we believe that the group's liquidity position should be secure until 2014. We also believe that Holcim should be able to fund the fine imposed by the Competition Commission of India from internal sources and still maintain its "strong" liquidity position.
Outstanding corporate bank lines and bonds at the parent or financial subholdings level are free from any financial covenants or rating triggers. In addition, these debt instruments feature limited cross-default provisions, which typically exclude operating subsidiaries, therefore removing the risk that any potential covenant breach by the group's subsidiaries would contaminate the parent company's debt.
The stable outlook mainly reflects our view that Holcim will continue to generate robust cash flow and stable EBITDA in 2013, in spite of somewhat unsupportive industry conditions. We also take into account that management will continue its efforts to protect credit measures in the coming quarters. As a result, we anticipate that the group's adjusted FFO-to-debt ratio (pro rata for the partially owned Indian operations) will likely gradually recover from the low twenties (in percentage terms) at year-end 2012, toward 25% on a sustained basis by year-end 2013, which is a level more commensurate with the rating.
Conversely, if main credit metrics were to deteriorate from the levels we calculated on Sept. 30, 2012, the group would not have much room for maneuver at the current rating level. Such a scenario could, for instance, be triggered by renewed market deterioration; substantial erosion in the EBITDA margin of more than 100bps following unsuccessful price hikes or further increases in input costs. Overall, however, we believe the chief downside risk for the rating would be a shift to more aggressive financial policy actions than we currently anticipate in terms of share repurchases or dividend payouts. Generally, we do not believe that Holcim's current credit metrics provide room for debt-financed acquisitions in the coming quarters.
At this stage we foresee limited ratings upside in the next few quarters. We could consider an upgrade if credit metrics were to further improve to sustainable levels at the upper end of those we view as commensurate with the "significant" financial risk profile. This would likely arise in combination with a pronounced industry recovery, in our opinion, which would enable the group to use its operating leverage.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business And Financial Risks In The Global Building Products And Materials Industry, Nov. 19, 2008
-- Notching For Structural Subordination, March 28, 2001
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