Sept 26 - Overview
-- We are assigning a 'BB+' rating to LYB Finance Co. BV's existing $300
million 8.1% senior unsecured notes due 2027. LYB Finance is an indirect
wholly-owned subsidiary of petrochemical company LyondellBasell Industries N.V.
-- We affirmed all our ratings on LyondellBasell, including the 'BBB-'
corporate credit rating.
-- We are revising our liquidity assessment to "strong" from "adequate".
-- The stable outlook reflects our view that LyondellBasell will maintain
an "intermediate" financial risk profile that supports the current corporate
credit rating, despite industry cyclicality.
On Sept. 26, 2012, Standard & Poor's Ratings Services assigned its 'BB+'
rating to the existing $300 million 8.1% senior unsecured notes due 2027
issued by LYB Finance Co. BV (formerly Montell Finance Co. B.V.).
At the same time, we affirmed all our ratings on LyondellBasell Industries
N.V., including the 'BBB-' corporate credit rating. The outlook is stable.
Standard & Poor's Ratings Services' ratings on Netherlands-based
LyondellBasell Industries N.V. reflect the company's "fair" business risk
profile and "intermediate" financial risk profile. LyondellBasell is a leading
global petrochemical producer, with sales totaling more than $50 billion in
2011. Most of its products are cyclical commodities, such as ethylene,
propylene, and their derivatives--including various plastic resins used to
manufacture a wide variety of durable goods and consumer products. The company
also produces automotive and other fuels at a refinery in Houston. The company
closed an unprofitable refinery in France earlier this year.
We rate the senior unsecured debt of both LyondellBasell (a holding company)
and LYB Finance (a finance subsidiary) one notch below the corporate credit
rating because we view these obligations as structurally subordinated to
liabilities (including accounts payable and postretirement liabilities) at
LyondellBasell's operating subsidiaries.
Commodity chemicals show high sensitivity to global GDP growth, supply and
demand imbalances, and raw material price movements. Despite significant
capital intensity, the industry has relatively low barriers-to-entry for many
product lines, creating high competition and weak pricing flexibility during
periods of excess supply. LyondellBasell has certain business strengths that
somewhat mitigate the risks, however. These include the company's large scale
of operations, management's focus on operational excellence and cost
reduction, and a portfolio of differentiated products (including advanced
polyolefins, propylene oxide and derivatives, and catalysts), which are more
profitable and stable than its commodity product lines.
We expect LyondellBasell to continue to benefit from an improved competitive
position and strong operating results during the next several years. This
partially stems from the availability of low-cost natural gas in the U.S.
However, during the next few quarters, results could moderate somewhat in the
face of weaker global economic conditions. Longer-term, we expect earnings to
remain highly cyclical, potentially declining sharply if capacity additions
exceed demand growth. We think LyondellBasell will focus primarily on
moderate-cost projects with high and quick returns. We believe the company
will consider larger investments only if management believes the company can
maintain credit metrics consistent with the current ratings. On the other
hand, in Europe, where LyondellBasell has higher-cost operations, we expect
market conditions to remain challenging. However, we believe results there
should continue to benefit from a focus on higher-margin downstream products,
such as automotive plastics and byproduct sales.
LyondellBasell has performed strongly and generated significant cash since
emerging from bankruptcy in April 2010 with much more prudent capitalization,
a better cost structure, and lower environmental and other liabilities. Since
then, it has benefited from a favorable supply and demand balance and an
advantaged cost position in the U.S. The company has also reduced debt
significantly, lowered borrowing costs, and extended debt maturities. The
company remains committed to maintaining at least $3 billion of available
Profitability varies meaningfully from quarter to quarter, but adjusted
trailing-12-month EBITDA margins have exceeded 10% for the past two years, and
pretax return on capital is strong, above 20%. We expect EBITDA margins to
average in the high-single-digit percentage area, with pretax return on
capital averaging in the low- to mid-teen percentage area.
Total adjusted debt is $6.1 billion. We adjust debt to include about $1.8
billion of capitalized operating leases and tax-effected unfunded
postretirement, asset retirement, and environmental obligations. The company's
funds from operations (FFO)-to-total debt ratio is currently about 65%. At the
current rating, we expect LyondellBasell to maintain an "intermediate"
financial risk profile with FFO-to-debt averaging 40% to 45% and remaining
near 30% at cyclical troughs.
Private equity firm Apollo Management Holdings L.P. recently reduced its
ownership stake in LyondellBasell somewhat to about 27%. Another large
shareholder, Access Industries LLC, currently holds about 14%. We believe that
ownership by these historically financially aggressive entities is unlikely to
result in financial policies that increase leverage or reduce liquidity to
levels inconsistent with the current ratings. In addition, LyondellBasell was
recently added to the Standard & Poor's 500 Index, which should further
diversify the holders of its publicly traded shares.
Earlier this year, LyondellBasell increased its regular dividend to an annual
rate of about $920 million. The company has sized its regular dividend so that
it can continue to pay it without borrowing, even in industry troughs.
Therefore, we expect the company to generate excess cash at other times and
periodically consider paying special dividends as it did in 2011. We regard
ongoing litigation and regulatory matters as modest risk factors.
We have revised our liquidity assessment to "strong" from "adequate". We base
this revision on LyondellBasell's recent entry into a new, currently unused $1
billion three-year accounts receivable program, our expectation that near-term
cash flow generation will be stronger than previously expected, and the
company's continued adherence to prudent financial policies.
We believe that sources of liquidity will exceed uses by 1.5x or more and that
sources will exceed uses even if EBITDA drops by 30%. Our assessment of the
company's liquidity profile incorporates the following observations and
-- To deal with industry cyclicality and potential spikes in working
capital caused by changes in raw material costs, selling prices, and demand
patterns, we expect the company to maintain at least $3 billion in cash and
available credit under its revolving credit facility and accounts receivable
securitization programs. These include a $2 billion revolver maturing in 2017,
a $1 billion accounts receivable program maturing in 2015, and a euros 450
million accounts receivable program maturing in 2013. As a result, the company
should also be able to absorb high-impact, low-probability events with limited
need for refinancing.
-- We think operating cash flow will remain more than sufficient to fund
average annual capital spending of about $1.5 billion, and common dividends at
the current annual rate of $920 million.
-- The company has no significant maturities of funded debt until 2019.
-- We believe the company has well-established and solid relationships
with banks and enjoys a generally high standing in credit markets.
The outlook is stable. LyondellBasell operates in a cyclical industry. Results
could weaken somewhat in the coming quarters if global economic conditions
deteriorate, particularly in Europe, where LyondellBasell has substantial and
higher-cost operations. Longer-term, earnings and cash flow could suffer if
supply growth exceeds demand growth. We expect LyondellBasell to maintain
ratios appropriate for the rating, including an FFO-to-total debt ratio
averaging at least 40% to 45% and remaining near 30% even in industry troughs.
We believe the company can maintain a sufficiently strong financial profile to
support the rating even if revenues drop by 20% and EBITDA margins decline to
7% from trailing-12-month levels of about 11%. Also key to maintaining the
ratings are the continuation of prudent financial policies and sufficient
We could lower the ratings if there were an unexpected shift in financial
policies, such that shareholder returns are more aggressive than we expect or
the company pursues very large debt-funded acquisitions or capital
investments, even if they are financed off balance sheet.
During the next few years, we could consider a slightly higher rating if
LyondellBasell improves its business risk profile to "satisfactory" by making
investments that promote increased stability and diversification, and the
company continues to perform strongly and maintain prudent financial policies.
Related Criteria And Research
-- 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: Criteria For Rating Companies In The Global
Commodity Chemicals Industry, Sept. 19, 2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
LyondellBasell Industries N.V.
Corporate credit rating BBB-/Stable/--
LyondellBasell Industries N.V.
Senior unsecured BB+
LYB Finance Co. B.V.
$300 mil. 8.1% senior unsecured
notes due 2027 BB+
Complete ratings information is available to subscribers of RatingsDirect on
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