-- Braskem S.A.'s expected deleveraging has been delayed due to
soft demand and competition from imports, resulting from global overcapacity.
However, despite its recent underperformance, the firm's main credit ratios
should gradually start to recover by year-end 2012.
-- The strength of Braskem's business profile, the company's commitment
to deleveraging, and its strong liquidity continue to support its
-- We are affirming our 'BBB-' global scale and 'brAAA' national scale
ratings on Braskem.
-- The stable outlook reflects our expectation that the company counts on
the operating and financial flexibility to reach the financial ratios that, in
our view, are commensurate with the current rating levels.
On Nov. 8, 2012, Standard & Poor's Rating Services affirmed its 'BBB-' global
scale and 'brAAA' national scale ratings on Brazil-based petrochemical company
Braskem S.A. The outlook remains stable.
The rating affirmations are primarily based on our expectations that Braskem
will maintain its competitive advantages in the Federative Republic of
Brazil's (foreign currency rating BBB/Stable/A-2, local currency rating
A-/Stable/A-2) petrochemical industry, its increasingly efficient operations
with larger scale and feedstock diversification, and its strong ownership,
which provides it with the flexibility to adjust to industry downturns.
Despite the company's weak performance in the first half of 2012, we believe
that it continues to have capital discipline and committed with an important
deleverage that should allow it by year-end 2013 to show net debt financial
metrics that are more commensurate with our current assessment of a
"significant" financial risk profile.
Despite strong competition from imports, the company benefits from its
dominant position in Brazil's petrochemicals market as the sole local producer
of polyethylene and polypropylene, and a leading supplier of polyvinyl
chloride (PVC). Braskem's feedstock contracts with Petrobras, its close
commercial relationships with its fragmented customer base, and its strong
distribution capabilities allow it to sell products at adequate margins--even
under severe competitive pressure. We believe that Braskem's more balanced
feedstock mix between naphtha and ethane, its high flexibility to plan
production efficiently at several plants, its economies of scope and scale,
and its operating synergies will help the company weather uncertainties and,
potentially, a longer market downturn.
The company reported a much weaker-than-expected operating performance during
2012, as a result of an important deceleration in industrial production in
Brazil, import competition due to global excess capacity and favorable tax
treatment to imported products in Brazil, and lower thermoplastic resin
prices. Furthermore, the company's capacity utilization improvements were not
enough to counterbalance lower petrochemicals spreads effects. These factors,
combined with the devaluation of the Brazilian real (R$) versus the U.S.
dollar, caused the company's adjusted total debt to EBITDA to spike to 5.7x in
the 12 months ended September 2012, which is significantly higher than the
3.9x for the same period last year.
We expect that Braskem's main credit metrics will start to gradually improve
by year-end 2012, since spreads and volumes started to increase in the second
half of 2012. In our base case scenario, we anticipate a 5% growth in volumes
during the next 12 month--in line with stronger GDP growth in Brazil in
2013--and new capacity coming on stream from 2013 to 2015. We also assume that
spreads in resins and petrochemicals will improve to the levels seen in 2011.
Besides some recovery in demand, we believe that certain recent measures that
the Brazilian government implemented to support the domestic economy should
have a direct impact on petrochemicals. These measures include the elimination
of some fiscal incentives on imports, higher import tariffs, and a substantial
decreased in interest rates.
As a result, we expect consolidated sales to increase by about 4% in 2013, and
EBITDA margins to improve to low double digits. Under this scenario, we
estimate that Braskem will post adjusted total debt to EBITDA closer to 5x (or
net adjusted debt to EBITDA close to 4x) and funds from operations (FFO) to
adjusted debt of about 15% (FFO to adjusted net debt trending to 20%) by
We assess Braskem's liquidity as "strong." The company reported sound cash
reserves of R$3.8 billion as of Sept. 30, 2012, compared with short-term debt
of R$1.4 billion. In addition, about 70% of the total outstanding debt is
scheduled to mature after 2015, and only 6% and 7% of the total will mature in
2012 and 2013, respectively.
Our liquidity assessment reflects several assumptions and considerations:
-- Liquidity sources (including cash on hand, discretionary cash flow,
and availability under the company's credit facility) exceeding cash uses
by 1.85x in 2012 and 3x in 2013;
-- Liquidity sources continuing to exceed uses, even if EBITDA were to
decline by 30%;
-- The company has undrawn committed credit facilities due 2013 and 2016
for about R$1.2 billion;
-- Significant flexibility to downward revise capital expenditures under
an unexpected financial stress scenario for the company;
-- Braskem continuing to manage its working capital efficiently,
resulting in low short-term financing needs;
-- Access to diversified funding sources, leading to an adequate debt
profile, with average tenor of 15 years, based on Braskem's access to
international debt markets and its solid and well-established relationships
-- Absence of restrictive covenants; and
-- Generally prudent financial risk management.
The stable outlook reflects our expectation that the company counts on the
operating and financial flexibility to reach the financial ratios that, in our
view, are commensurate with the current rating levels. We anticipate that
margins will recover with the start-up of capacity expansions, the gradual
recovery of the petrochemical industry dynamics, and the Brazilian government
measures to stimulate the industry. As a result, we also expect FFO to net
debt to trend to 20% and net debt to EBITDA to be lower than 4x by year-end of
2013, before strengthening further in 2014 and 2015. The rating stability also
depends on Braskem maintaining a strong liquidity position.
We could lower the ratings if the company's operating performance by the end
of 2012 and beginning of 2013 does not start to recover as expected, making it
more difficult for it to reach the expected deleverage in 2013. Because we
anticipated an important improvement in credit metrics in our ratings
analysis, we believe an upgrade is unlikely in the medium term.
Related Criteria And Research
-- Key Credit Factors: Criteria For Rating Companies In The Global
Commodity Chemicals Industry, Sept. 19, 2012
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity
Descriptors For Global Corporate Issuers, July 2, 2010
Global Scale Rating BBB-/Stable/--
Brazilian Rating Scale brAAA/Stable/--
Braskem America Finance Company
Braskem Finance Ltd.
Braskem International Ltd.
Senior Unsecured BBB-
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
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