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May 13 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Akzo Nobel N.V.'s (AkzoNobel)
Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'. The
Outlook is Negative.
The Negative Outlook reflects Fitch's opinion that AkzoNobel's credit metrics
continue to offer limited headroom for headwinds or underperformance under the
ongoing restructuring projects. In 2013, restructuring charges, top-up pension
payments and unfavourable foreign exchange movements offset the benefits of the
group's restructuring programme and translated into margin erosion, negative
free cash flow (FCF) generation and leverage above the 2.0x medium-term upper
bound for the rating. However, in mitigation, we forecast a gradual improvement
in credit metrics on the back of the group's focus on debt reduction and as it
benefits from the back ended restructuring measures of 2013 and stronger volumes
The ratings are underpinned by AkzoNobel's leading global market positions,
diversified and strong portfolio, and sound capital structure.
KEY RATING DRIVERS
The Negative Outlook reflects uncertainties with regards to AkzoNobel's ability
to restore its credit metrics to levels commensurate with a 'BBB+' rating. Funds
from operations (FFO) adjusted net leverage was 2.3x at end-2013, down from 4.0x
at end-2012, compared with Fitch's negative guideline of 2.0x. The 2014 rating
base case assumes a marginal increase in demand in the group's core markets and
a further improvement in debt metrics through the current deleveraging effort. A
stalling of the fragile recovery or an intensification of the current FX
headwinds could halt these trends.
Fragile Demand Recovery
AkzoNobel faces higher downside risk than its chemical peers as macro challenges
are exacerbated by its exposure to weak housing and construction end-markets in
Europe. Our 2014 base case assumes a low single-digit reduction in sales as
disposals and FX effects and restructuring costs offset improving demand and
pricing trends. This is in line with the trends reported in 1Q14. We forecast a
moderate improvement in margins yoy.
Restructuring to Underpin Profitability
Fitch's rating base case assumes that gains from the group's restructuring
measures will offset inflationary production costs and foreign-exchange
headwinds in emerging markets in 2014. AkzoNobel reported EBITDA savings of
EUR545m from the multi-year performance improvement programme (PIP) at end-2013,
ahead of its original target of EUR500m by end-2014. The group expects new
initiatives launched in 2014 to cost EUR250m (EUR348m for PIP in 2013), with
annual recurring savings of the same amount.
Focus on Deleveraging
Cash generation was boosted by EUR988m net inflows from divestments in 2013. The
low-margin US decorative paints business was sold to PPG Industries, Inc.
(A-/Stable) for USD1.05bn in April 2013. The group also sold its building
adhesives business to Sika AG for EUR260m in October. Proceeds from the
disposals were used to redeem two bonds due in 2013 and 2014 and reduce net debt
to EUR1.6bn at end-2013 from EUR2.4bn a year earlier. Management estimates that
this should translate into a EUR80m reduction in the group's funding costs.
Although reduced compared with historical levels, AkzoNobel's pension
contributions continue to weigh heavily on its cash flow generation, and partly
explain why the group's FFO leverage ratios compare unfavourably with those of
its rating peers. The base case assumes top-up payments of EUR330m per year from
2014. In March 2014, the ICI pension trustees entered into two annuity policies
hedging the longevity risk for EUR4.3bn of the group's EUR14.9bn pension
liabilities. These will reduce requirements for future additional cash flow
contributions but will increase P&L financing expenses by EUR25m and reduce its
balance sheet equity by EUR640m.
At end-2013, cash balances were EUR2.1bn, and EUR1.8bn was available under a
multi-currency revolving facility maturing in 2018 (no covenants). This compared
with maturing debt of EUR961m in 2014, EUR825m of which represented a 7.75% bond
that was redeemed in January 2014. Our base case assumes roughly flat cash
dividends and capex of around EUR600m in 2014. We forecast neutral to marginally
positive FCF over the next two years.
Negative: A deterioration in trading conditions, material debt financed
acquisitions, shareholder-friendly actions or delays/overspend on restructuring
measures leading to sustained lease adjusted net FFO leverage above 2.0x and/or
Positive (revision of the Outlook to Stable): Visible performance gains from the
restructuring programme, with underlying margin improvements, positive FCF
generation and deleveraging on a sustainable basis to FFO net leverage below