RPT-Fitch revises Solvay's outlook to stable; affirms at 'A-'
Sept 5 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has revised the Outlook on Belgium-based Solvay SA's Long-term Issuer Default Rating (IDR) to Stable from Negative. The agency has also affirmed Solvay's IDR and senior unsecured ratings at 'A-', Short-term rating at 'F2' and subordinated hybrid bond rating at 'BBB'. Rhodia SA's bond rating has also been affirmed at 'BBB+' (see details below).
The rating actions reflects our opinion that Solvay's debt metrics will be restored to levels commensurate with a 'A-' rating over the next two years, despite challenging market conditions. The ratings reflect Solvay's 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.
Increased Headroom under Metrics
Solvay's 2012 credit metrics were slightly better than anticipated under our previous forecasts. Free cash flow (FCF) was EUR374m (Fitch's calculation) aided by working capital inflows, and net funds from operations (FFO) adjusted leverage was 1.5x. We had projected negative FCF and net FFO adjusted leverage of 1.7x at end-2012. Under our rating base case, which conservatively assumes limited recovery in market conditions in 2014, FCF is expected to be marginally negative in 2013 on the back of high capex and neutral to positive afterwards. Net FFO adjusted leverage peaks at 1.6x and reduces gradually thereafter. This compares with our negative rating guideline of FFO net leverage sustained materially above 1.5x through the cycle.
Positive View on Solvay-Ineos JV
The announced 50/50 Solvay-Ineos JV provides upside for the rating case. We believe that the transaction will enhance Solvay's business profile and financial flexibility. The JV, which will combine Ineos's and Solvay's European PVC assets, will limit Solvay's exposure to the ailing European PVC sector and rebase its margins above 15% through the cycle. The assets it will contribute had sales of EUR1.9bn in aggregate in 2012 and we estimate that EBITDA was roughly EUR150m (8% margin). The new company is expected to be the second-largest global PVC producer by capacity with combined sales (proforma 2012) of EUR4.3bn with EBITDA of EUR257m. Solvay intends to exit the JV four to six years after its creation. Solvay will receive an upfront cash payment of EUR250m upon closing, on an exit value based on a mid-cycle EBITDA multiple of 5.5x. Closing is expected by year-end.
Our base assumptions remain conservative and offer further upside potential. In particular, limited incremental growth is assumed from Solvay's ongoing capex programme. The forecasts also ignore the remaining targeted savings from Solvay's Horizon programme and from integration benefits of procurement, logistics and streamlining. In total, the group announced cost-efficiency gains of EUR400m (vs 2010 proforma cost base) from end-2014, of which EUR190m was realised in 2011-2012. 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.
Strong Business Profile
Solvay's ratings reflect its position as the world's leading producer of specialty polymers, soda ash, polyamides, specialty surfactants, silica, rare earth systems and generated 38% of its 2012 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 around EUR1.9bn and 15%, respectively, under the base rating case.
Pension Liabilities Weigh on Metrics
The recurring cash outflows associated with material pension liabilities weigh on the group's FFO-based metrics, which compare unfavourably with those of its rating peers. The pension funding gap increased to EUR2.8bn at end-2012 (EUR2.4bn at end-2011) from EUR0.9bn at end-2010 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.
Base Case Assumption
EBITDA is forecast at around EUR1.8bn in 2013, slightly below 2012 EBITDA (Fitch's calculation). This assumes continuously weak market conditions in the PVC, polyamide, rare earths and soda ash segments. It also reflects reduced prices for guar gum from the record levels of 2012. These trends should be partly offset by good performances in silica, acetow and specialty polymers. The EBITDA margin is projected marginally below 2012 level at 14.4%. FCF generation is mildly negative in 2013-2014 and mildly positive in the following years, based on annual capex assumed above historical levels at around EUR0.8bn (EUR0.9bn in 2013).
At end-Q213 cash balances amounted to EUR1.2bn and Solvay had access to committed credit lines of EUR550m (maturity 2017) and EUR1bn (2015). This compared with maturing short-term debt of EUR331m. Cash requirements in 2013 include capex of EUR0.9bn (Fitch's assumption) and cash dividends of EUR308m paid in H113.
Positive: Profitability improvements and enhanced cash flow generation resulting positive FCF and net FFO-based adjusted based leverage sustained below 1.0x through the cycle.
Negative: The ratings could come under pressure if FCF remains consistently negative and FFO adjusted net leverage is sustained materially above 1.5x through the cycle. Through-the-cycle EBITDAR margin below 15% would put pressure on the ratings.
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 5 August 2013 at www.fitchratings.com). These ratings will be maintained for the duration of the instruments and as long as Rhodia provides audited financial statements.
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