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April 9 (The following statement was released by the rating agency)
Fitch Ratings has placed Lafarge SA's (Lafarge) 'BB+' Long-term Issuer Default Ratings (IDR) and senior unsecured bonds on Rating Watch Positive (RWP), following the announcement of its merger with Holcim Ltd (Holcim; BBB/Stable).
The RWP reflects our expectations that Lafarge's IDR could be upgraded following completion of the merger with Holcim. However, an upgrade would depend on the combined entity's financial profile and group structure. The RWP also reflects the combined group's improved scale, diversification and market positions and the synergy potentials between the two companies. We forecast FFO adjusted leverage in excess of 3.5x for the combined group in 2015, given the share-exchange of the two companies, with no additional debt to be raised by either company. We expect substantial disposal proceeds from the contemplated sale of assets accounting for 10%-15% of group 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.
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. These measures will support the combined group's credit profile 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.
Positive: Future developments that could lead to positive rating actions include:
- Lafarge's rating could be upgraded on completion of the merger with Holcim. However, an upgrade would depend on the combined entity's financial profile and group structure.
- On a standalone basis, an upgrade could occur if the company deleverages via operating cash flow, extraordinary measures or disposals, leading to an FFO gross leverage ratio 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 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.