(The following statement was released by the rating agency)
Oct 02 -
-- We think French chemicals producer SPCM S.A.'s (SNF) quarterly EBITDA could stay close to its strong first-half 2012 level given its positioning on defensive and growing end-markets, and its limited exposure to Europe.
-- Consequently, we believe our ratio of adjusted funds from operations to debt for SNF could remain at 25%-30% in 2012 and beyond.
-- We are revising the outlook to positive from stable and affirming the 'BB' long-term rating on SNF. We are also assigning our 'BB' issue rating to the company's proposed senior unsecured notes, with a recovery rating of '4'.
-- The positive outlook reflects the potential for an upgrade within 12 months if EBITDA reaches about EUR250 million in 2012, we believe it will stay above EUR230 million thereafter, and we gain further confidence that funds from operations to debt stays at 25%-30%.
On Oct. 2, 2012, Standard & Poor's Ratings Services revised its outlook on France-based chemicals producer SPCM S.A. (SNF) to positive from stable. At the same time we affirmed the long-term corporate credit rating on the company at 'BB' and all issue and recovery ratings (see Ratings List below). We also assigned a 'BB' issue rating to SNF's proposed EUR250 million senior unsecured notes, with a recovery rating of '4', indicating our expectation of average (30%-50%) recovery for creditors in the event of a payment default.
The outlook revision reflects our view that our ratio of adjusted funds from operations to debt for SNF could remain at 25%-30% in 2012 and beyond. In addition, we think its quarterly EBITDA could stay close to its strong first-half 2012 level given its positioning on defensive and growing end-markets, such as polymers for water treatment (close to 50% of 2011 sales) and on the high-growth oil and gas segment (25%). We also factor in its limited exposure to Europe, which accounted for only 24% of 2011 sales, while North America contributed 49% and Asia 22%.
Following SNF's second-quarter results and our review of its updated business plan, we have revised up our base-case 2012 EBITDA forecast for SNF to EUR250 million from EUR210 million previously. SNF reported EBITDA of EUR130 million and volume growth of 4.6% in first-half 2012, which is in sharp contrast to the typical volume declines of 2%-3% for most chemical players. New polyacrylamide capacities of about 55kt that SNF expects to bring online in 2012, combined with robust end-markets, is fueling volume growth. Our forecast assumes that volatile raw materials prices, especially propylene, won't negatively affect EBITDA.
From 2013, we project EBITDA will remain at or above EUR230 million under our base-case scenario. This factors in somewhat lower margins compared with 2012 levels, because of more expensive feedstock or lower selling prices. Underpinning these forecasts is our belief that SNF's EBITDA will remain resilient to the European recession and generally weakened global macro-economic environment, as it did in the 2008-2009 financial crisis and its limited exposure to Europe.
SNF's "satisfactory" business risk profile, under our criteria, is based on its world market leadership in polyacrylamide polymers to treat municipal and industrial water (48% of total 2011 sales) and to alter viscosity of water injected in tight oil and gas developments (25% of sales). SNF is the largest producer in the world of polyacrylamides, and reported a 42% share of year-end-2011 global production capacity. The company has posted exceptional organic growth, expanding its capacity to 560kt at year-end 2011 from 420kt at year-end 2009. Negative factors affecting SNF's business risk include its limited product diversity through its presence in what we view as a niche market, ongoing sizable expansionary capital expenditure (capex), and the presence of several competitors, notably in China.
Our assessment of SNF's financial risk profile as "significant" factors in the company's growth focus and subsequent funding needs for capex and working capital, which will likely limit free cash flow and resulted in negative free cash flow over the past years. We also view recourse to debt (including secured bank debt) as material. Positive factors, however, are the better-than-peer stability of SNF's credit metrics, as demonstrated in 2009. In our view, the company also has intrinsically stronger free cash flow ability, if and when growth decreases and on the understanding that its maintenance capex is a mere EUR15 million per year (compared with average capital spending of about EUR140 million per year in 2010-2012). Lastly, we also expect acquisitions and shareholder distributions to remain low at less than EUR10 million per year, and therefore view SNF's family ownership as a neutral credit factor. We view very positively the company's successful and comprehensive mid-2010 refinancing, two years ahead of maturity.
We assess SNF's liquidity as "adequate," according to our corporate liquidity methodology, which classifies a company's liquidity in one of five categories.
We expect SNF's liquidity sources to exceed liquidity uses by more than 1.2x in the 12 months starting July 1, 2012.
We take into account the following positives:
-- EUR95 million of cash on June 30, 2012, of which we view EUR25 million as tied to operations and thus not immediately available for debt reduction;
-- EUR87 million available on June 30, 2012, under major committed bank lines maturing in June 2015, subject to maintenance covenants;
-- Adequate covenant leeway with, for example, a net debt-to-EBITDA ratio of 2x on June 30, 2012, well below the 3.5x limit. Our rating factors in continued sufficient headroom. Covenants are tested semiannually and become contractually tighter; and
-- FFO of about EUR160 million in 2012 and EUR150 million in 2013 in our base-case scenario.
Our base-case scenario captures the following needs:
-- Capex in the vicinity of EUR115 million in 2012 and EUR130 million in 2013. Positives are that: capex may be adjusted or postponed if need be, as demonstrated in 2009; expansion plans are largely based on small-to-midsize capacity additions; and maintenance capex is very limited at around EUR15 million per year;
-- Working-capital outflows at about EUR80 million in 2012, as revenues continue to grow; and
-- A manageable debt amortization schedule, in our view, with EUR72 million due in 2012, EUR36 million in 2013, and EUR37 million in 2014.
The issue rating on the proposed EUR250 million senior unsecured notes is 'BB', in line with the corporate credit rating on SNF. The recovery rating on these notes is '4', indicating our expectation of average (30%-50%) recovery for creditors in the event of a payment default. Proceeds from issuance will be used to refinance the existing EUR190 million 8.25% unsecured notes (due June 2017). The proposed terms and conditions are mostly in line with those on the existing notes, although some of the restrictions (including restricted payments and permitted debt) have been loosened. These changes remain modest, typical for this type of issue, and in line with the company's current size and operating performance.
The proposed senior notes are unsecured and unguaranteed obligations of SNF. In our view, these notes rank behind the senior secured bank facilities, which benefit from share pledges and intercompany loans security that provide bank lenders with a structurally more senior claim at the company's operating subsidiaries. In our view, therefore, recovery prospects are limited by a material level of prior-ranking debt facilities that include both the bank debt and local facilities at certain operating subsidiaries.
The unsecured notes' documentation is relatively typical for issues of this kind. There is a bullet repayment structure and incurrence covenants that limit the raising of additional debt if fixed-charge coverage were to exceed 2.25x. There is also a limitation on raising priority debt, based on a priority debt-to-consolidated cash flow test that sets a 2.5x maximum ratio. According to the documentation, the payment of dividends is restricted to 50% of consolidated new income. The senior facilities agreement includes maintenance covenants including net debt to EBITDA, senior net debt to EBITDA, and interest coverage.
SNF is headquartered in France, a jurisdiction that we consider to be relatively unfavorable for creditors, although the company has also some multijurisdictional risk, in China, the U.S. and South Korea, for example.
To calculate recoveries, Standard & Poor's simulates a payment default. Our simulated default scenario for SNF assumes heightened price pressures because of intense competition, rising feedstock, increasing interest costs on variable rate debt, continued investment in new projects in 2012-2014, funded under the capex facility, and delays in commissioning new production capacity. Our simulation projects a default in 2015, when the secured bank debt facility is due, at which point, EBITDA would have dropped to about EUR100 million and SNF's gross enterprise value would be about EUR605 million.
At the point of default, we assume that the revolver and the capex facility would be fully drawn. We deduct priority liabilities of about EUR71 million, consisting of enforcement costs, 50% of the company's pension deficit, and finance leases. This leaves a net enterprise value of EUR534 million. We then deduct priority debt obligations totaling almost EUR403 million, comprising the senior secured debt and allowing for a fully drawn revolver and capex facility and local debt facilities. Under our calculations, about EUR131 million of value would be left available for noteholders. Assuming an outstanding balance of senior unsecured notes of EUR250 million, there would be sufficient value for recovery in the 30%-50% range.
The positive outlook reflects the potential for a one-notch upgrade within 12 months if SNF's EBITDA reaches around EUR250 million in 2012, and EUR230 million subsequently, and we gain further confidence that SNF will be able to post FFO to debt of about 25%-30% on a sustainable basis. The possible upgrade would also hinge on continued adequate liquidity and covenant leeway.
We would revise the outlook to stable if financial debt increases significantly compared with end- June 2012 levels. A rise could be caused in our opinion by larger-than-anticipated working capital outflow, if quarterly EBITDA is materially lower than about EUR60 million under our base case, or if we believe financial covenant compliance may become tight within two or three years.
Related Criteria And Research
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Key Credit Factors: Business and Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008
Ratings Affirmed; Outlook Action
Corporate Credit Rating BB/Positive/-- BB/Stable/--
Senior Unsecured BB BB
Recovery Rating 4 4
EUR250 mil bnds BB
Recovery Rating 4