(The following statement was released by the rating agency)
Aug 31 -
Summary analysis -- Brenntag AG ----------------------------------- 31-Aug-2012
CREDIT RATING: BBB-/Stable/-- Country: Germany
Primary SIC: Chemical
Mult. CUSIP6: 107180
Credit Rating History:
Local currency Foreign currency
09-Jun-2011 BBB-/-- BBB-/--
09-Apr-2010 BB+/-- BB+/--
25-Nov-2009 B+/-- B+/--
The ratings on Germany-based Brenntag AG, a leading full-line distributor of industrial and specialty chemicals, reflect what Standard & Poor’s Ratings Services views as the group’s “satisfactory” business risk profile and “significant” financial risk profile, as our criteria define these terms. The company reported 2011 sales of EUR8.7 billion: 49% in Europe, 31% in North America, 9% in Latin-America, and a growing but still modest 5% in Asia-Pacific.
Brenntag’s “satisfactory” business risk profile is underpinned by its leading market position in the chemicals distribution industry, and strong geographic, customer, and product diversification. Other business strengths include, in our view, the company’s satisfactory and resilient profitability, benefitting from a highly variable cost structure and low capital intensity. Brenntag’s operating performance has proven resilient to market fluctuations, as observed during the 2009 economic downturn. Risk factors include the highly fragmented nature of the industry, and the cyclicality of chemicals demand. Volatility of chemical product prices and related inventory losses pose a key risk for distributors, but Brenntag historically has been able to pass on price variations in good time. We believe this stems from its strong market position and business model, with fast-moving working capital and small customer order sizes.
We assess Brenntag’s financial risk profile as “significant”. This is supported by our view of the group’s prudent liquidity management and strong cash flow generation. We notably view the group’s track record in generating healthy discretionary cash flow as a key strength. Nevertheless, the financial risk thus far has been constrained, in our view, by the still limited track record since its IPO in early 2010, and by potentially significant debt fluctuations related to working capital movements.
S&P base-case operating scenario
In our base-case assessment, we expect Brenntag’s 2012 EBITDA to be close to EUR700 million (up from EUR658 million in 2011 and compared with management guidance of EUR705 million-EUR735 million). We believe such an increase is likely achievable, notwithstanding the challenging European economic environment, but bearing in mind a weaker euro, economic growth in the Americas and Asia, as well as the impact of several modest-size acquisitions.
We expect Brenntag to maintain its EBITDA margin at 7%-8% in 2012 and 2013. This is partly thanks to the group’s variable cost base, which in our view enables Brenntag to show resilient operating performance to market fluctuations.
S&P base-case cash flow and capital-structure scenario
In our base-case forecast, we expect Brenntag’s Standard & Poor‘s-adjusted ratio of funds from operations (FFO) to net debt will remain at least 25% both in 2012 and 2013, compared with 25.1% for the 12 months ended June 30, 2012.
For 2012, we anticipate that FFO of close to EUR450 million will comfortably exceed expected capital spending of about EUR90 million, approximately EUR103 million in a dividend to the parent, as well as likely continued working capital outflows assumed at about EUR100 million. Brenntag’s discretionary cash flow should therefore remain in the range of EUR150 million-EUR200 million, which the company tends to use to finance bolt-on acquisitions. Accordingly, we expect debt to remain largely unchanged in the coming years. Adjusted debt stood at EUR1.84 billion on June 30, 2012.
We assess Brenntag’s liquidity as “strong”, according to our criteria, as the ratio of liquidity sources to liquidity needs exceeded 1.5x as of June 30, 2012. Our liquidity assessment is supported by recurring free cash flows and a long-dated debt maturity profile.
Liquidity sources at end-June 2012 comprised:
-- Reported cash and cash equivalents of EUR309 million, of which we currently treat EUR40 million as tied to operations to take into account seasonality;
-- EUR500 million available under Brenntag’s EUR1.5 billion committed credit facility due 2016 and approximately EUR40 million available under a EUR220 million securitization program, maturing June 2014; and
-- Free cash flow, calculated as FFO less capital expenditure, of about EUR350 million, under our base-case assumptions.
Liquidity uses for the next 12 months may include:
-- Short-term debt of EUR100 million as of June 30, 2012;
-- Dividend payments of over EUR100 million; and
-- Working-capital swings, which we estimate may vary between EUR50 million and EUR200 million, influenced notably by the economic conditions, chemical prices, and seasonality.
We see ample headroom under financial covenants during 2012 and 2013 under the syndicated loan documentation. The company is well within the net debt-to-EBITDA threshold of 3.4x for 2012: For instance, net debt to EBITDA as defined in the loan agreements stood at 2.1x as of June 30, 2012.
The stable outlook reflects our expectation of Brenntag’s resilient profits, and its global presence, which should mitigate the recessionary environment in Europe. We view an average adjusted ratio of FFO to net debt of at least 25% as commensurate with the current ratings.
We do not exclude rating upside over the medium term, depending on a continually supportive financial policy and assuming further strong operational results and free cash flow.
A more aggressive financial policy or unexpected midsize or large debt-funded acquisitions could put pressure on the ratings.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Methodology and Assumptions: Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business and Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008