(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
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
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
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
-- 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