(The following statement was released by the rating agency)
Jan 08 -
Summary analysis -- Linde AG -------------------------------------- 08-Jan-2013
CREDIT RATING: A/Stable/A-1 Country: Germany
Primary SIC: Gas and other
Mult. CUSIP6: 535223
Credit Rating History:
Local currency Foreign currency
25-May-2012 A/A-1 A/A-1
14-Apr-2010 A-/A-2 A-/A-2
14-Apr-2008 BBB+/A-2 BBB+/A-2
The ratings on Germany-based Linde AG reflect our view of its “excellent” business risk profile and its “intermediate” financial risk profile, according to our criteria. Our view of Linde’s business risk profile is based primarily on its position as the world’s second-largest manufacturer in the credit-supportive industrial gases industry, and generally stable cash flows. A significant proportion of contracts in Linde’s tonnage segment is long term and has energy pass-through clauses and minimum volume offtake clauses. Other strengths are the sector’s high growth rates and Linde’s strong geographic diversity. The group also benefits from its technological expertise and the strong market position of its engineering operations. The recent acquisition of U.S.-based homecare health company Lincare Holdings Inc. strengthened Linde’s business profile because it doubled the size of its existing health care business and improved geographic diversity, including raising exposure to the North American market. With the acquisition of Lincare, Linde has become the market leader in the U.S. homecare health market, benefitting from the ongoing consolidation of the sector.
Linde’s “intermediate” financial risk profile reflects our view of its “strong” liquidity position and more conservative financial policy than in the past. The company targets a net debt-to-EBITDA ratio of a maximum 2.5x. Thanks to the recent equity increase, we estimate this ratio will reach about 2x pro forma the Lincare transaction. We consider that the company’s likely continued high capital expenditures could weigh somewhat on its free cash flow. Another risk factor relates to contingent risk and intrinsically more volatile cash flows from the engineering operations, although these only account for about 10% of Linde’s EBITDA.
S&P base-case operating scenario
We anticipate Linde will generate increased revenues in its industrial gases operations in at least the mid-single-digit range organically, after achieving about an 8% increase in revenues to EUR11.1 billion in 2011. In the first nine months 2012, revenues in the gases division increased by 10.7% on a reported basis. Consequently, we also expect EBITDA to continue to rise and likely exceed EUR3 billion in 2012, compared with EUR3.0 billion in 2011. EBITDA margins tend to be resilient and should remain at 22%-23% under our scenario of a margin of about 26% for industrial gases and at least 10% for the engineering activities.
Linde’s management has announced that it expects EBITDA to exceed EUR4 billion by 2013, one year earlier than previously expected. This is based on overall industry growth rates of approximately 5%-7%, combined with Linde’s substantial organic investments for growth and in particular the full consolidation of the Lincare acquisition.
S&P base-case cash flow and capital-structure scenario
We calculate that Linde’s leverage headroom for the ratings will decline significantly as a result of the Lincare acquisition, despite Linde’s equity increase of EUR1.4 billion executed in July. We anticipate the ratio of adjusted funds from operations (FFO) to debt-pro forma the acquisition-will drop to just below 35% at year-end 2012, from about 45% in 2011. Our leverage standard for the current rating is adjusted FFO to debt of 35%-40%. The company’s net debt to EBITDA target is a maximum of 2.5x. Thanks to the equity increase, we estimate this ratio will reach about 2x pro forma the Lincare transaction. We consider that the company’s likely continued high capital expenditures could weigh somewhat on its free cash flow.
The short-term rating is ‘A-1’. We classify Linde’s liquidity as “strong” under our criteria. As of Sept. 30, 2012, the company’s ratio of liquidity sources to liquidity needs exceeded 1.5x over the next 12 months.
As of Sept. 30, 2012, the key sources of liquidity for the next 12 months amounted to EUR6.8 billion, including:
-- Cash and short-term investments of about EUR2.0 billion, of which we consider EUR0.225 billion tied to the operations. This includes EUR600 million invested in high-rated government bonds with maturities of between one and two years, which we include in our surplus cash calculation;
-- Our estimate of FFO of about EUR2.5 billion in 2012; and
-- A fully undrawn EUR2.5 billion syndicated facility maturing in 2015, which contains no financial covenants.
The above already includes two debt capital market issues in September 2012, namely an eight-year, EUR1 billion bond and a five-year Norwegian krone 2 billion (EUR271 million) bond. Together with the EUR1.4 billion equity capital increase in July, these transactions helped reducing the EUR3.6 billion acquisition facility to slightly below EUR1 billion.
This compares with liquidity needs of EUR4.2 billion for the same period, including:
-- Short-term maturities of EUR1.5 billion and overall low debt maturities in 2013 and 2014;
-- Capital expenditures of about EUR1.9 billion;
-- Dividend distributions of about EUR0.5 billion; and
-- Potential moderate cash outlays of EUR0.3 billion related to working capital.
The stable outlook reflects our view that, overall, Linde’s credit metrics should remain commensurate with the current rating, although the $4.6 billion Lincare acquisition has weakened them significantly. The financing through equity of EUR1.4 billion and the already partly refinanced acquisition facility’s longer term debt in our view reflects management’s commitment to its publicly stated, prudent financial policy. It counterbalances the higher level of acquisitions than we previously assumed.
Pressure on the rating could arise should the adjusted FFO-to-debt ratio fall to lower than the 35% (pro forma the Lincare acquisition) that we see as commensurate with the current rating. Because headroom under the rating will reduce considerably, further debt-funded acquisitions in the short term, a material increase of capital expenditures, or more aggressive shareholder distributions would also be negative for the rating.
We do not foresee upside to the rating given management’s ambitious growth aspirations and commitment to adjusted FFO to debt in the 35%-40% range, which we see as more in line with the current rating.