RPT-Fitch affirms Lafarge at 'BB+'; outlook stable
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July 12 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Lafarge SA's Long-term Issuer Default Rating (IDR) at 'BB+' and senior unsecured rating at 'BB+'. The Outlook on the Long-term IDR is Stable.
The affirmation reflects Fitch's expectation that Lafarge will be able to deleverage quickly in 2013 reaching credit metrics in line with the current rating, despite debt in 2012 being higher than Fitch's expectations and leverage being stretched for the current rating level. Recovery in the US, positive trends in emerging markets and ramp-up of cost-cutting measures should sustain margins, despite the western European market remaining very difficult. The revamping of the disposal process should support debt reduction.
KEY RATING DRIVERS
Accelerating Cost Cutting
The measures adopted by Lafarge to gain efficiency are gaining traction and should deliver EUR600m additional EBITDA in 2013, including the expected contribution of innovation initiatives. Eased cost inflation and a positive trend on pricing in most markets should also support margins. Fitch expects part of these benefits to be offset by lower volumes in western Europe but operating performance to improve, with EBITDA growth at mid-single digit rates in both 2013 and 2014.
Capex Strictly Managed
As part of its cash preservation strategy, Lafarge has reduced its capex in the past few years to less than EUR800m in 2012 through a combination of reduced maintenance capex and an extremely prudent expansion policy. The capex target for 2013 is EUR800m, although this level could be exceeded if divestments support it. Fitch expects capex to remain tight in 2014 at EUR1.0bn-EUR1.1bn, while growth in cement markets in emerging countries could drive an acceleration in expansion capex from 2015.
Disposals Back On Track
Following a slowdown in 2012, when proceeds from non-core assets sales were only EUR400m compared with a EUR1.0bn target, the disposal process has been revamped in 2013. Circa EUR1.0bn disposals have been already secured in 2013, including the US gypsum division. Disposals remain a key driver in the deleveraging process.
Stretched Credit Metrics
FFO gross leverage at 5.7x in 2012 (4.8x on a net basis) is high for the current rating, but Fitch expects deleveraging to accelerate, driven by both operating performance improvement and the acceleration in the non-core assets disposal process. In particular, Fitch forecasts FFO gross leverage to return to 4.0x in the next 18 months, a level in line with the current rating.
Solid Business Profile
Fitch views Lafarge's business profile as strong, and compatible with an investment grade rating. Major positive traits are Lafarge's solid global market position in the cement industry, its above-average profitability and its wide geographical diversification, with a presence in more than 60 countries.
Fitch expects Lafarge's management to remain focused on deleveraging and to maintain a strong commitment to restoring credit metrics. Any evidence of a relaxation on this policy, such as further delays in the disposal process, sustained deterioration in working capital or increase of capex above the expected levels could lead to a negative rating action.
Positive: Future developments that could lead to positive rating actions include:
- Faster/stronger deleveraging, achieved via both operating cash-flow, extraordinary measures or disposals, with FFO gross leverage ratio improving to around or below 3.5x.
- Positive FCF on a sustained basis.
- FFO fixed charge cover above 3.5x on a sustained basis.
Negative: Future developments that could lead to negative rating action include:
- A deterioration of the trading activity affecting operating cash flow generation and resulting in FFO gross leverage in excess of 4.5.x on a sustained basis.
- Consistently negative FCF.
- FFO fixed charge cover below 3.0x on a sustained basis.
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