Our view of the company's financial risk profile as intermediate somewhat
constrains the ratings. We factor in the sensitivity of Akzo's sizable
postretirement obligations to actuarial assumptions. Lower discount rates have
led to an increased pension deficit in 2012, notwithstanding sizable top-up
payments made, weakening Akzo's Standard & Poor's adjusted credit metrics. The
company's financial risk profile is supported, however, by our view that
Akzo's generation of funds from operations (FFO) is recurring and free cash
flow potential before dividends is strong. We also view the company's recently
announced disposal of its North American Decorative Paints business to PPG
Industries Inc. (BBB+/Stable/A-2) as a stabilizing factor for the rating. The
assets to be sold had generated negative cash flows in the past few years and
reached break-even only in recent quarters. Akzo has announced it intends to
use the cash proceeds of $875 million for investments in its continuing
operations and deleveraging.
S&P base-case operating scenario
In our base-case assessment, we anticipate that Akzo will report revenues of
about EUR16.5 billion in 2012 (this includes North American Decorative Paints,
which Akzo will report separately as "held for sale"), up from EUR15.7 billion
in 2011 (of which EUR1.1 billion related to the North American Decorative Paints
business), based on strong pricing trends and supported by a weaker euro, but
also integrating softer volumes across its three divisions.
We believe Akzo will report more than EUR1.9 billion in 2012 EBITDA (before
special charges and benefits, according to the company), compared with EUR1.8
billion in 2011. After satisfactory first-nine-month 2012 EBITDA of EUR1.5
billion, we expect a weaker fourth quarter, owing to the uncertain
macroeconomic environment, including further softening in demand in the
decorative paints segment.
Furthermore, Akzo expects the targeted benefits of EUR500 million EBITDA from
its recently announced performance improvement program to be realized only in
2014 (EUR200 million in benefits expected for full-year 2012). Related
incremental costs will likely amount to EUR425 million over 2012-2014.
S&P base-case cash flow and capital-structure scenario
While pressure on Akzo's cash flow based credit metrics started to build
during 2012 due to adverse movements in actuarial pension-related assumptions,
we think credit ratios will quickly be restored in second-quarter 2013, with
an inflow of $875 million cash disposal proceeds and the transfer of $175
million of pension obligations (of which about $100 million will reduce Akzo's
pension deficit under IFRS according to the group), both related to Akzo's
disposal of its North American Decorative Paints business.
Adverse movements in actuarial pension-related assumptions this year mean that
we now forecast Akzo's adjusted debt to rise by a hefty EUR1 billion
year-on-year to EUR4.6 billion at year-end 2012. We have therefore revised down
our base-line forecast for Akzo's 2012 Standard & Poor's-adjusted FFO to net
debt to around 28%, from 35% in our summary analysis published Oct. 10, 2012,
and down from 32% achieved at year-end 2011.
Following the disposal, we assume the ratio will improve to at least 35% and
further increase in 2014, depending on the final allocation of the disposal
proceeds to investments or debt reduction, and factoring in the increased
profit upside from the above-mentioned cost improvement program.
For 2012, we anticipate adjusted FFO of about EUR1.2 billion--after adding back
sizable pension-related top-up payments--to cover adjusted capital spending of
about EUR0.8 billion and EUR0.3 billion in dividends (including to minority
Despite ongoing large top-up payments, the company's pension deficit increased
to about EUR0.9 billion as of the end of September 2012, compared with EUR0.5
billion at year-end 2011 and EUR1 billion at year-end 2010, as a result of the
very low discount rates that increased the net present value of its long-ended
(notably U.K.) pension obligations. Akzo had gross pension obligations of as
much as EUR15.5 billion at year-end 2011, offset by EUR14.6 billion in low-risk
pension assets (with only 15% invested in equities).
The 'A-2' short-term rating reflects our view of the company's "strong"
liquidity as per our criteria. We forecast liquidity sources exceeding
liquidity needs by more than 1.5x over the 12 months started Sept. 30, 2012.
Liquidity sources as of Sept. 30, 2012, over the following 12 months comprise:
-- Reported cash of EUR1.5 billion. We treat EUR0.4 billion of this as tied
to operations, given the company's seasonality and restricted cash.
-- EUR1.8 billion availability under credit facilities, which are not
subject to any financial covenants. Akzo completed an extension in September
of EUR1.7 billion to 2017, with the remainder of about EUR65 million (which has
not been extended) maturing in 2016.
-- Positive free cash flow of about EUR0.2 billion, before dividends and
discretionary pension-top-up payments of EUR0.3 billion per year.
Our estimate of sources does not include the expected cash proceeds of $875
million (EUR665 million) from the disposal of Akzo's North American Decorative
Paints business announced in December 2012, which it expects to complete in
Liquidity uses for the same period may include:
-- Short-term debt of about EUR347 million as of Sept. 30, 2012. A $500
million bond comes due in December 2013.
-- Dividend payments (including to minority shareholders) of about EUR0.3
We also note that in January 2014 a EUR825 million bond comes due.
The stable outlook reflects our view that despite weakening demand and the
substantial increase in Akzo's pension deficit and adjusted debt, Akzo's
adjusted FFO-to-debt ratio should quickly recover in 2013 to above 35%. We
would consider this level to be commensurate with the current ratings. This
factors in the proceeds from the recently announced sale of the North American
Decorative Paints business and the related transfer of pension obligations, as
well as management's supportive financial policies and commitment to improve
Downside ratings pressure could arise if Akzo's adjusted FFO to debt fell
below 30% without near-term prospects of recovery or if it generated
substantial negative free operating cash flow (FOCF), for example due to a
combination of a difficult macroeconomic environment, sizable capital
spending, and an ongoing squeeze on margins owing to raw materials prices. In
addition, we do not factor in unanticipated significant acquisitions into the
We do not exclude ratings upside over the medium term, provided we were
confident that Akzo would generate healthy sustainable positive FOCF, notably
if the challenging economic climate were to persist. In addition, ratings
upside would depend on sufficiently supportive financial policies, and
management's commitment to higher credit metrics.
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,
September 18, 2012
-- 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