TEXT-Fitch affirms Holcim at 'BBB', stable outlook

Mon Jan 21, 2013 5:46am EST

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Jan 21 - Fitch Ratings has affirmed Holcim Ltd's (Holcim) Long-term Issuer Default Ratings (IDR) at 'BBB'. The Outlook is Stable. A full list of rating actions is provided at the end of this release.

Current gross leverage looks stretched for the current rating level: funds from operations (FFO) gross leverage was 4.0x at end-2011 and Fitch expects it to marginally improve at end-2012. However operating performance and cash generation have been improving and Fitch expects credit metrics to be restored to a comfortable level in 2013.

KEY DRIVERS

- Improving Operating Performance

Fitch expects Holcim's EBITDA to have increased in 2012, on the back of positive volumes and pricing trends in all major markets, except Europe. Operating performance could further improve in 2013 and 2014, boosted by a moderately favourable price trend, eased cost inflation and the cost cutting and efficiency measures adopted by management. Holcim's efficiency programme aims at increasing operating profit by at least CHF1.5bn by 2014, via both cost savings (CHF1.0bn) and top-line improvements (i.e. increased service sales, better mix, etc.) Fitch expects the EBITDA margin to improve in the next two years, although not returning to pre-crisis levels.

- Declining Debt

Net debt at September 2012 was at CHF11.6bn was lower than both September 2011 and December 2011 levels. Taking into account the normal seasonal unwinding of working capital in Q4, Holcim Ltd.'s net debt should materially decline by year end. Debt reduction is also supported by non-core assets disposal, such as the sales of minority stakes in some subsidiaries completed in December or the sale of treasury shares in March 2012.

- Restoring Capex

Capex should resume to more normal levels, after being squeezed in the 2010-2012 period. In particular, Fitch expects maintenance capex to be restored to CHF1.1bn-CHF1.2bn annually from 2013 (compared to CHF600m-CHF800m annually in the previous three years). Expansion capex should also increase, mainly due to capacity addition in South East Asia and Brazil, although Fitch does not expect capex to return to pre-crisis levels.

- Credit Metrics

FFO gross leverage at 4.0x looks high for the current level of rating, partly due to Holcim's prudent liquidity policy. Net leverage ratios look more favourable. Fitch expects FFO leverage to improve significantly, especially from 2013, when the benefit of improved operating cash flow generation should start to be material. In particular, Fitch forecasts FFO gross leverage to return to below 3.5x in both 2013 and 2014.

- Emerging Market Growth

Trading conditions are still difficult in Europe, due to weak demand, and the outlook for 2013 remains challenging. By contrast, North America is recovering faster than expected, and the price trend is favourable, although the recovery remains subject to macro uncertainties. Emerging market continue to represent the strongest growth driver. In most Latin America and South East Asia markets (India and Indonesia) both cement price and volumes trends continue to be positive.

- Strong Market Position

Holcim's IDR reflects the company's strong market position in cement, aggregates and concrete, and its wide geographical diversification, with a presence in more than 70 countries and a balanced mix between developed and emerging markets.

RATING SENSITIVITY GUIDANCE:

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

- Declining leverage, with FFO gross leverage to improve below 2.5x on a sustained basis, and adjusted FFO net leverage below 2.0x. Adjusted net leverage is calculated by deconsolidating the 50% controlled Indian subsidiaries (i.e. excluding their contribution to EBITDA but including their dividend flows to the group) and considering only the cash available at holding level.

- FCF to remain materially positive on a sustained basis.

- EBIT margin to remain comfortably above 10% on a sustained basis.

Negative: Future developments that could lead to negative rating action include:

- Increasing leverage, with FFO gross leverage remaining above 3.5x and adjusted FFO net leverage (calculated as above) above 3.0x on a sustained basis.

- Free cash flow (FCF) to remain neutral to negative

FULL LIST OF RATING ACTIONS

Holcim

Long-term IDR: affirmed at 'BBB'; Outlook Stable

Short-term IDR: affirmed at 'F2'

Senior Unsecured Debt: affirmed at 'BBB'

Holcim Finance (Australia) Pty Ltd

Senior Unsecured Debt: affirmed at 'BBB'

Aggregate Industries plc

Senior Unsecured Debt: affirmed at 'BBB'

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