Sept 5 - Fitch Ratings has affirmed Belgium-based Solvay S.A.'s
(Solvay) Long-term Issuer Default Rating (IDR) and senior unsecured ratings at
'A-', its Short-term rating at 'F2' and its subordinated hybrid bond at 'BBB'.
The Outlook on the Long-term IDR has been revised to Negative from Stable.
Simultaneously, the agency has affirmed the senior unsecured rating on Rhodia's
outstanding bonds at 'BBB+'. The one-notch differential between Rhodia's and
Solvay's senior unsecured ratings reflects the limited operational overlap and
legal ties between the companies (see "Parent and Subsidiary Rating Linkage"
dated 8 August 2012 at www.fitchratings.com). These ratings will be maintained
for the duration of the instruments and as long as Rhodia provides audited
Solvay's ratings reflect its strong business profile with above-average
portfolio, end-market and geographic diversification. These have been enhanced
by Rhodia's complementary offering and provide some protection against the
inherent demand cyclicality and raw material price volatility of some of the
group's more commoditised products. Solvay is the world's leading producer of
soda ash, polyamides, specialty surfactants, silica, rare earth systems and
generated 40% of its 2011 pro forma sales from emerging markets. In Fitch's
view, margins and operating cash flows should exhibit limited volatility through
the cycle with EBITDA and EBITDA margin sustained above 15% and EUR2bn,
respectively, under the base rating case.
The revision of the Outlook to Negative reflects Fitch's opinion that a
protracted weakness in market conditions could adversely affect Solvay's ability
to restore its debt protection measures back to pre-acquisition levels over the
rating horizon. The recurring cash outflows associated with its material pension
liabilities weigh on the group's funds from operations (FFO)-based metrics which
compare unfavourably with those of peers at the same rating level. Under the
agency's base case, Fitch calculated free cash flow (FCF) is only marginally
positive between 2012 and 2014 and net FFO adjusted leverage gradually reduces
from 1.7x (Fitch's calculations). This leaves little headroom versus Fitch's
1.5x negative rating guideline for FFO net leverage through the cycle.
However, the agency stresses that its base case assumptions are conservative and
offer some upside potential. In particular, limited incremental growth is
assumed from Solvay's ongoing capex programme. The forecasts also ignore the
remaining targeted savings of EUR345m between H212 and end-2014 from Solvay's
Horizon programme and from integration benefits of procurement, logistics and
streamlining. In total, the group announced efficiency gains of EUR400m per
annum as of from end-2014, of which EUR55m were realised in H112 and a further
EUR75m are planned for H212. Finally, Fitch's projections exclude potential
milestone payments from Abbott Laboratories Inc. ('A+'/RWN) as agreed at the
time of the sale of the pharmaceutical business.
Under the 2012 base case, EBITDA is forecast at around EUR2.0bn, slightly below
the reported pro forma 2011 EBITDA of EUR2.1bn. This assumes weaker market
conditions in H212 than in H112 with intensifying pressure on volumes, prices
and margins in the Vinyls and Polyamide Materials segments. EBITDA margin is
projected at 15.6%, down from pro forma 16.3% reported for 2011. This also
reflects reduced demand for Silica and a drop in Rare Earths prices and volumes
from the record levels of 2011. These trends should be partly offset by strong
performances in Consumer Chemicals and Acetow & Eco Services and sustained
pricing power in Specialty Polymers.
From 2012 onwards, the base case assumes a mid-single digit growth in sales and
a marginal improvement in EBITDA margin. FCF generation is mildly negative in
2012 and mildly positive in the following years, based on annual capex assumed
above historical levels at around EUR0.8bn. Cash requirements include dividend
distributions (EUR266m in 2012) and EUR200m in contributions towards the pension
obligations. The pension funding gap increased to EUR2.4bn at end-2011 from
EUR0.9bn due to the inclusion of Rhodia's net pension liabilities. In line with
its methodology, Fitch's treatment of these obligations focuses on their cash
Liquidity is expected to remain strong. At June 2012, cash balances amounted to
EUR1.5bn and Solvay had access to committed credit lines of EUR550m (maturity
2016) and EUR1bn (2015), and further bilateral credit lines of EUR550m. This
compares with short-term debt of EUR471m.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
- Profitability improvements and enhanced cash flow generation resulting in net
FFO-based adjusted based leverage sustained below 1.5x through the cycle.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
- Net FFO adjusted leverage maintained at or above 1.5x through the cycle,
sustained negative free cash flow (FCF) generation and/or through-the-cycle
EBITDAR margin below 15% would put pressure on the ratings.
Additional information is available on www.fitchratings.com. The ratings above
were unsolicited and have been provided by Fitch as a service to investors.
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, is
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology