Fitch Affirms Holcim Ltd at 'BBB'; Outlook Stable

Wed Apr 9, 2014 3:47pm EDT

(The following statement was released by the rating agency) LONDON, April 09 (Fitch) Fitch Ratings has affirmed Holcim Ltd's (Holcim) Long-term Issuer Default Ratings (IDR) at 'BBB', following its announcement to merge with Lafarge SA (Lafarge) through a public exchange offer with an exchange ratio of one new Holcim share for each Lafarge share.. The Outlook is Stable. A full list of rating actions is provided at the end of this release. The affirmation reflects the combined group's improved scale, diversification and market positions on completion of their announced merger and the synergy potentials between the two companies. We forecast funds from operations (FFO) adjusted leverage in excess of 3.5x for the combined group in 2015, compared to 3.5x for Holcim in 2013, given Lafarge's higher leverage and the contemplated all share transactions , with no additional debt to be raised by either. We expect substantial disposal proceeds from the contemplated sale of around 10%-15% of the combined group's EBITDA, which could improve the combined group's financial flexibility, if proceeds are used to repay debt. KEY RATING DRIVERS Diversification and Market Position The announced merger between Holcim and Lafarge will create the world's largest building materials company, with combined annual revenues of around CHF39bn (EUR32bn). It will hold number one market positions in cement, aggregates and ready-mix products and benefit from the individual companies' complementary asset base in Latin America and Africa & Middle East. Synergies Management aims to reap CHF1.7bn (EUR1.4bn) in synergies over three years through best practices and cross-utilisation, financial savings and optimised capex allocation. In addition, the group plans to implement CHF500m in (EUR410m) in working capital savings over three years. These measures will support the credit profile of the combined group in the long-term, although the associated costs will offset the benefits in the near-term. Disposals Could Improve Leverage We expect closing of the merger to be contingent on asset disposals and expect substantial proceeds from the disposal of around 10%-15% of the combined group's EBITDA. These could improve the combined group's financial profile, if proceeds are used to repay debt, given that the merger is structured as a pure share deal in a merger of equals and will not incur additional indebtedness. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating actions include: - If disposal proceeds are used to repay debt, leading to FFO gross leverage improving to below 2.5x (3.7x at end-13) and adjusted FFO net leverage below 2.0x (3.1x at end-13). Adjusted gross and net leverage is calculated by pro-rata consolidation of the Indian controlled subsidiaries. - Consolidated FFO adjusted gross leverage below 3.0x (3.5x at end-13). - Consolidated free cash flow (FCF) remains materially positive on a sustained basis (0.2% in 2013). Negative: Future developments that could lead to negative rating action include: - EBIT Margin, pro-rata consolidated for the Indian subsidiaries, is below 10% (11.7% in 2013). - Deconsolidated ratios (calculated as above): Increasing leverage, with FFO gross leverage remaining above 3.5x and adjusted FFO net leverage above 3.0x on a sustained basis. - Consolidated FFO adjusted gross leverage is above 4.0x. - Consolidated FCF to remain neutral to negative. The rating actions are as follows: Holcim Ltd Long-term IDR: affirmed at 'BBB'; Outlook Stable Short-term IDR: affirmed at 'F2' Senior Unsecured Debt: affirmed at 'BBB' Holcim Capital Corporation Ltd. Senior Unsecured Debt: affirmed at 'BBB' Holcim Finance (Australia) Pty Ltd Senior Unsecured Debt: affirmed at 'BBB' Holcim Finance (Canada) Inc. Senior Unsecured Debt: affirmed at 'BBB' Holcim Finance (Luxembourg) S.A. Senior Unsecured Debt: affirmed at 'BBB' Holcim GB Finance Ltd. (UK) Senior Unsecured Debt: affirmed at 'BBB' Holcim Overseas Finance Ltd. Senior Unsecured Debt: affirmed at 'BBB' Aggregate Industries Holdings Limited (UK) Senior Unsecured Debt: affirmed at 'BBB' Contact: Principal Analyst Ha-Anh Bui Director +44 20 3530 1566 Supervisory Analyst Frederic Gits Managing Director+ 33 1 44 29 91 84 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Committee Chair Stuart Reid Senior Director +44 20 3530 1085 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Corporate Rating Methodology', dated 05 August 2013, is available at www.fitchratings.com. Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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