(Agency corrects the version originally issued on Nov. 16, 2012 to correct Ciech's
stand-alone credit profile, which was previously misstated in the fourth paragraph of the
Rationale. A corrected version follows.)
(The following statement was released by the rating agency)
Nov 21 -
-- Poland-headquartered Ciech S.A. is a leading player in the Central and Eastern
European soda ash industry.
-- Ciech is proposing to issue EUR225 million senior secured notes and Polish zloty (PLN)
382.3 million domestic notes to refinance its existing debt.
-- We are assigning our preliminary 'B' long-term corporate credit rating to Ciech and our
preliminary 'B' issue rating to the proposed EUR225 million senior secured notes.
-- The stable outlook reflects our view that Ciech's liquidity will improve following the
notes issuance and that its soda ash business will remain resilient to the currently volatile
On Nov. 16, 2012, Standard & Poor's Ratings Services assigned its preliminary 'B' long-term
corporate credit rating to Poland-headquartered soda ash producer Ciech S.A. The outlook is
At the same time, we assigned our preliminary 'B' issue rating to Ciech's EUR225 million
senior secured notes. We are not rating the company's Polish zloty (PLN) 382.3 million domestic
notes and PLN100 million revolving credit facility (RCF) due 2015.
The issue rating on the EUR225 million notes is based on draft documentation and is subject
to our review of the final terms and conditions. Any change to the final terms and conditions
could affect the ratings.
The preliminary ratings on Ciech reflect the company's capital structure pro forma for the
placement of the proposed EUR225 million and PLN382.3 million senior secured notes. Ciech will
use the funds to repay its existing debt. The preliminary ratings also reflect our assessment of
Ciech's business risk profile as "weak" and its financial risk profile as "aggressive."
In 2011, Ciech reported about PLN4 billion (approximately EUR1 billion) of sales and about
PLN320 million of EBITDA. Ciech holds long-established leading market positions in Central and
Eastern Europe (CEE) as a producer of synthetic soda ash, which accounts for roughly 50% of
group sales but 75% of EBITDA. The company operates four soda ash plants in Poland, Germany, and
Romania, with total production capacity of about 2.2 million tons. Soda ash sales are split
between Poland (34%), Germany (26%), Romania and the Czech Republic (17%), and Northern Europe
Ciech is also engaged in production of other chemical products, notably polyurethanes and
toluene di-isocyanate (TDI), epoxy resins, and plant protection chemicals. However, Ciech is
currently restructuring or selling many of these activities.
Our preliminary corporate credit rating on Ciech reflects its stand-alone credit profile of
'b', without any uplift for extraordinary support from the government of the Republic of Poland
(foreign currency A-/Stable/A-2, local currency A/Stable/A-1). Although the Polish government
owns 39% of Ciech, we view the likelihood of it providing timely and sufficient extraordinary
support to Ciech in the event of financial distress as "low," as per our criteria on
government-related entities. We base our view of a "low" likelihood of support on our assessment
-- "Limited" role for the Polish government, reflecting our view of Ciech's operations as
non-strategic. Our view is underpinned by the privatization plan that the Polish Ministry of
Treasury published in March 2012, in which Ciech was not included in the state's portfolio of
-- "Limited" link with the government because we understand that the government may dispose
of its stake in Ciech in the near term. In addition, there is a lack of a formal mechanism for
the government to provide timely extraordinary support to Ciech. That said, the Polish
government participated in Ciech's 2011 capital increase.
Ciech's "aggressive" financial risk profile incorporates our leverage forecast of about 4.3x
at year-end 2012. We forecast Standard & Poor's-adjusted debt of about PLN1.7 billion at
year-end 2012, corresponding to unadjusted net financial debt of PLN1.07 billion. We recognize
that leverage is likely to fall over 2013 as a result of planned disposals of underperforming
activities, notably the TDI operations of Ciech's subsidiary Zachem S.A., and a substantial
reduction in capital expenditure (capex) in 2013.
Offsetting these financial constraints are, however, Ciech's "adequate" liquidity position
post the proposed refinancing, with no medium-term debt maturities. We take a positive view of
management's focus on deleveraging, illustrated by an equity issuance of PLN0.4 billion in 2011,
whose proceeds it used for debt repayment.
Our assessment of Ciech's business risk profile as "weak" takes into account uncertainties
over the ongoing restructuring of underperforming activities. Our assessment also reflects
supply and demand risks associated with new capacity additions, for example, a capacity
expansion for low-cost natural soda ash in Turkey, potentially by 2014-2015. Secondary
weaknesses are Ciech's limited product mix, with soda ash being the company's main profit
generator. Ciech also relies on a small group of suppliers for its key raw materials such as
brine and limestone. However, we recognize that there is some backward integration, notably of
the company's Polish operations into steam production, and its German operations into limestone
and brine, and partly into steam and electricity.
Positively, we factor into our assessment of business risk Ciech's leading market position
in soda ash, reflected in its 98% market share in Poland and No. 2 position in Europe after
market leader Solvay S.A. (BBB+/Negative/A-2). We also see Ciech's soda ash activities
as less cyclical than the chemical industry as a whole, with about 60% of end-market demand from
glass applications. Moreover, we assume industry growth of about 2%-3% per year in Ciech's core
CEE markets. Ciech's soda ash activities have healthy profitability, underpinned by low cash
costs and close proximity to its well-established group of customers. Competitive threats are
mitigated by transportation costs, which in our view limit the risk of imports from Russia or
Asia for instance.
Under our base-case credit scenario, we forecast that EBITDA from continuing operations will
improve to at least PLN390 million in 2012, compared with PLN330 million in 2011. This forecast
factors in strong EBITDA of PLN328 million in the first nine months of 2012 (adjusted for PLN357
million of write-offs and other non-recurring items). This is thanks to supportive soda ash
prices and past investments, notably related to energy efficiency. We recognize Ciech's strong
results in the third quarter of 2012, supported by the stable performance of its soda ash
business. At the same time, our forecasts for the fourth quarter of the year and 2013 are more
prudent in light of challenging macroeconomic conditions, although we factor in the steady
performance of the soda ash business.
Under our base case, we therefore forecast an improvement in adjusted debt to EBITDA to
about 3.8x in 2013, compared with 4.3x that we anticipate in 2012 and 5.0x in 2011. Our forecast
for further debt reduction in 2013 stems from a combination of Ciech realizing proceeds from
disposals, which we assume at about PLN120 million, and generating positive free operating cash
flow of at least PLN100 million. The latter assumption factors in that Ciech will substantially
reduce its capex in 2013 to about PLN120 million, compared with PLN255 million on average over
the past three years, which included significant development and expansion investments.
We take a negative view of the complexity of Ciech's accounts, because historic performance
is characterized by significant write-offs and non-recurring items. Our adjustments to reported
debt at year-end 2011 are substantial at PLN0.4 billion and notably include PLN270 million of
finance leases. Of this amount, PLN158 million relates to sale-and-leaseback liabilities on a
heat and power plant, and had risen to PLN261 million as of September 2012. We also add to debt
PLN32 million of factoring liabilities, PLN57 million in unfunded pensions and postretirement
expenses, and PLN82 million in operating leases. Finally, we estimate PLN70 million as being
tied to operations; neither do we net from debt PLN18 million of restricted cash.
We assess Ciech's liquidity as "adequate" under our criteria, after the issuance of the
proposed notes. This reflects the absence of medium-term debt maturities and our assumption of
full availability of the PLN100 million RCF due 2015. Our base-case credit scenario also factors
in comfortable initial headroom under the RCF covenant, although we note that the covenant steps
down substantially over the medium term.
Liquidity sources over the next 12 months may include:
-- PLN100 million of availability under the proposed long-term committed RCF due 2015;
-- Our estimate of PLN190 million of surplus cash post refinancing, compared with PLN160
million of reported cash on Sept. 30, 2012;
-- Funds from operations of about PLN200 million under our base case; and
-- Broadly neutral working capital.
Liquidity uses over the same period include:
-- No material near- to medium-term debt maturities, with the PLN382.3 million proposed
domestic notes maturing in 2017 and the EUR225 million proposed notes maturing in 2019; and
-- Greatly reduced capital spending of about PLN120 million.
The documentation for the proposed notes includes restrictions on the incurrence of
additional secured debt subject to compliance with a maximum senior secured leverage ratio of
3.5x until Dec. 31, 2014, and 3.0x thereafter. However, the documentation allows the company to
raise about EUR35 million of additional debt that may be secured on super seniority basis.
The preliminary issue rating on the proposed EUR225 million senior secured notes to be
issued by Ciech Group Financing AB is 'B', in line with the corporate credit rating. The issue
rating is subject to our review of the final documentation. We consider that the structural
subordination of the notes is not material, and is effectively mitigated by an extensive
The notes benefit from a comprehensive guarantee package from the parent and subsidiaries
accounting for more than 90% of consolidated revenues, 95% of EBITDA, and 85% of total assets.
The noteholders will have first-ranking security interests over the assets of all Ciech's
subsidiaries except Zachem, Transoda Sp. z o.o. and Ciech Finance. This includes security over
the proceeds loans; the share capital of the issuer and guarantors; as well as over real estate,
moveable assets, trade, and certain bank accounts.
In light of Ciech's asset disposal strategy, the notes' documentation contains a covenant
specifying that Ciech may use the net proceeds from any asset sale for the repayment of senior
secured debt, including the proposed notes, as well as for reinvestment in capex or permitted
businesses. Ciech may use the proceeds in this way within the next 12-18 months. Ciech will have
to use any proceeds that it does not use for the aforementioned purposes to buy back the
proposed notes and any other pari passu ranking debt at par.
The creditors under the RCF will share the collateral on a super priority basis and on a
pari passu basis with the creditors under the new domestic notes.
In terms of the insolvency jurisdiction, any insolvency proceedings against Ciech would most
likely originate in Poland. Although we have assigned an issue rating to the EUR225 million
notes, we have not assigned a recovery rating because our review of Poland's insolvency regime
is not complete.
The stable outlook reflects our view that Ciech's liquidity will remain "adequate" post
refinancing and that its soda ash business will continue to perform satisfactorily in the fourth
quarter of 2012 and in 2013, notwithstanding the currently difficult economic climate in Europe.
We view an adjusted ratio of debt to EBITDA of up to 5x as commensurate with the current rating.
Ratings upside could arise in 2013 if Ciech maintains satisfactory profits in the soda ash
business and achieves adjusted debt to EBITDA of less than 4x on a sustainable basis. Notably,
an upgrade depends on Ciech effectively executing its strategy of restructuring, disposing of
non-core activities, and reducing capex, which are key to our projection of the company
deleveraging in 2013.
Rating downside could arise if Ciech was unable to deleverage, leading to adjusted debt to
EBITDA of more than 5x. We envisage that this could occur if margins in Ciech's soda ash
business were to deteriorate unexpectedly as a result of new capacity additions and/or its
inability to dispose of underperforming activities.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept.
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade
Debt, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Corporate Credit Rating B(prelim)/Stable/--
Ciech Group Financing AB
Senior Secured Debt* B(prelim)
*Guaranteed by Ciech S.A.