November 16, 2012 / 3:51 PM / 5 years ago

S&P assigns Ciech preliminary 'B' rating; outlook stable

     -- Poland-headquartered Ciech S.A. is a leading player in the Central and 
Eastern European soda ash industry. 
     -- Ciech is proposing to issue EUR225 million senior secured notes and 
Polish zloty (PLN) 382.3 million domestic notes to refinance its existing 
     -- We are assigning our preliminary 'B' long-term corporate credit rating 
to Ciech and our preliminary 'B' issue rating to the proposed EUR225 million 
senior secured notes.
     -- The stable outlook reflects our view that Ciech's liquidity will 
improve following the notes issuance and that its soda ash business will 
remain resilient to the currently volatile economic climate. 

Rating Action
On Nov. 16, 2012, Standard & Poor's Ratings Services assigned its preliminary 
'B' long-term corporate credit rating to Poland-headquartered soda ash 
producer Ciech S.A. The outlook is stable.

At the same time, we assigned our preliminary 'B' issue rating to Ciech's EUR225
million senior secured notes. We are not rating the company's Polish zloty 
(PLN) 382.3 million domestic notes and PLN100 million revolving credit 
facility (RCF) due 2015. 

The issue rating on the EUR225 million notes is based on draft documentation and
is subject to our review of the final terms and conditions. Any change to the 
final terms and conditions could affect the ratings.

The preliminary ratings on Ciech reflect the company's capital structure pro 
forma for the placement of the proposed EUR225 million and PLN382.3 million 
senior secured notes. Ciech will use the funds to repay its existing debt. The 
preliminary ratings also reflect our assessment of Ciech's business risk 
profile as "weak" and its financial risk profile as "aggressive." 

In 2011, Ciech reported about PLN4 billion (approximately EUR1 billion) of sales
and about PLN320 million of EBITDA. Ciech holds long-established leading 
market positions in Central and Eastern Europe (CEE) as a producer of 
synthetic soda ash, which accounts for roughly 50% of group sales but 75% of 
EBITDA. The company operates four soda ash plants in Poland, Germany, and 
Romania, with total production capacity of about 2.2 million tons. Soda ash 
sales are split between Poland (34%), Germany (26%), Romania and the Czech 
Republic (17%), and Northern Europe (6%). 

Ciech is also engaged in production of other chemical products, notably 
polyurethanes and toluene di-isocyanate (TDI), epoxy resins, and plant 
protection chemicals. However, Ciech is currently restructuring or selling 
many of these activities. 

Our preliminary corporate credit rating on Ciech reflects its stand-alone 
credit profile of 'b+', without any uplift for extraordinary support from the 
government of the Republic of Poland (foreign currency A-/Stable/A-2, local 
currency A/Stable/A-1). Although the Polish government owns 39% of Ciech, we 
view the likelihood of it providing timely and sufficient extraordinary 
support to Ciech in the event of financial distress as "low," as per our 
criteria on government-related entities. We base our view of a "low" 
likelihood of support on our assessment of Ciech's: 

     -- "Limited" role for the Polish government, reflecting our view of 
Ciech's operations as non-strategic. Our view is underpinned by the 
privatization plan that the Polish Ministry of Treasury published in March 
2012, in which Ciech was not included in the state's portfolio of strategic 
     -- "Limited" link with the government because we understand that the 
government may dispose of its stake in Ciech in the near term. In addition, 
there is a lack of a formal mechanism for the government to provide timely 
extraordinary support to Ciech. That said, the Polish government participated 
in Ciech's 2011 capital increase.

Ciech's "aggressive" financial risk profile incorporates our leverage forecast 
of about 4.3x at year-end 2012. We forecast Standard & Poor's-adjusted debt of 
about PLN1.7 billion at year-end 2012, corresponding to unadjusted net 
financial debt of PLN1.07 billion. We recognize that leverage is likely to 
fall over 2013 as a result of planned disposals of underperforming activities, 
notably the TDI operations of Ciech's subsidiary Zachem S.A., and a 
substantial reduction in capital expenditure (capex) in 2013. 

Offsetting these financial constraints are, however, Ciech's "adequate" 
liquidity position post the proposed refinancing, with no medium-term debt 
maturities. We take a positive view of management's focus on deleveraging, 
illustrated by an equity issuance of PLN0.4 billion in 2011, whose proceeds it 
used for debt repayment.

Our assessment of Ciech's business risk profile as "weak" takes into account 
uncertainties over the ongoing restructuring of underperforming activities. 
Our assessment also reflects supply and demand risks associated with new 
capacity additions, for example, a capacity expansion for low-cost natural 
soda ash in Turkey, potentially by 2014-2015. Secondary weaknesses are Ciech's 
limited product mix, with soda ash being the company's main profit generator. 
Ciech also relies on a small group of suppliers for its key raw materials such 
as brine and limestone. However, we recognize that there is some backward 
integration, notably of the company's Polish operations into steam production, 
and its German operations into limestone and brine, and partly into steam and 

Positively, we factor into our assessment of business risk Ciech's leading 
market position in soda ash, reflected in its 98% market share in Poland and 
No. 2 position in Europe after market leader Solvay S.A. (BBB+/Negative/A-2). 
We also see Ciech's soda ash activities as less cyclical than the chemical 
industry as a whole, with about 60% of end-market demand from glass 
applications. Moreover, we assume industry growth of about 2%-3% per year in 
Ciech's core CEE markets. Ciech's soda ash activities have healthy 
profitability, underpinned by low cash costs and close proximity to its 
well-established group of customers. Competitive threats are mitigated by 
transportation costs, which in our view limit the risk of imports from Russia 
or Asia for instance. 

Under our base-case credit scenario, we forecast that EBITDA from continuing 
operations will improve to at least PLN390 million in 2012, compared with 
PLN330 million in 2011. This forecast factors in strong EBITDA of PLN328 
million in the first nine months of 2012 (adjusted for PLN357 million of 
write-offs and other non-recurring items). This is thanks to supportive soda 
ash prices and past investments, notably related to energy efficiency. We 
recognize Ciech's strong results in the third quarter of 2012, supported by 
the stable performance of its soda ash business. At the same time, our 
forecasts for the fourth quarter of the year and 2013 are more prudent in 
light of challenging macroeconomic conditions, although we factor in the 
steady performance of the soda ash business. 

Under our base case, we therefore forecast an improvement in adjusted debt to 
EBITDA to about 3.8x in 2013, compared with 4.3x that we anticipate in 2012 
and 5.0x in 2011. Our forecast for further debt reduction in 2013 stems from a 
combination of Ciech realizing proceeds from disposals, which we assume at 
about PLN120 million, and generating positive free operating cash flow of at 
least PLN100 million. The latter assumption factors in that Ciech will 
substantially reduce its capex in 2013 to about PLN120 million, compared with 
PLN255 million on average over the past three years, which included 
significant development and expansion investments. 

We take a negative view of the complexity of Ciech's accounts, because 
historic performance is characterized by significant write-offs and 
non-recurring items. Our adjustments to reported debt at year-end 2011 are 
substantial at PLN0.4 billion and notably include PLN270 million of finance 
leases. Of this amount, PLN158 million relates to sale-and-leaseback 
liabilities on a heat and power plant, and had risen to PLN261 million as of 
September 2012. We also add to debt PLN32 million of factoring liabilities, 
PLN57 million in unfunded pensions and postretirement expenses, and PLN82 
million in operating leases. Finally, we estimate PLN70 million as being tied 
to operations; neither do we net from debt PLN18 million of restricted cash.

We assess Ciech's liquidity as "adequate" under our criteria, after the 
issuance of the proposed notes. This reflects the absence of medium-term debt 
maturities and our assumption of full availability of the PLN100 million RCF 
due 2015. Our base-case credit scenario also factors in comfortable initial 
headroom under the RCF covenant, although we note that the covenant steps down 
substantially over the medium term. 

Liquidity sources over the next 12 months may include:
     -- PLN100 million of availability under the proposed long-term committed 
RCF due 2015;
     -- Our estimate of PLN190 million of surplus cash post refinancing, 
compared with PLN160 million of reported cash on Sept. 30, 2012; 
     -- Funds from operations of about PLN200 million under our base case; and
     -- Broadly neutral working capital.

Liquidity uses over the same period include:
     -- No material near- to medium-term debt maturities, with the PLN382.3 
million proposed domestic notes maturing in 2017 and the EUR225 million proposed
notes maturing in 2019; and
     -- Greatly reduced capital spending of about PLN120 million.

The documentation for the proposed notes includes restrictions on the 
incurrence of additional secured debt subject to compliance with a maximum 
senior secured leverage ratio of 3.5x until Dec. 31, 2014, and 3.0x 
thereafter. However, the documentation allows the company to raise about EUR35 
million of additional debt that may be secured on super seniority basis. 

Structural subordination
The preliminary issue rating on the proposed EUR225 million senior secured notes
to be issued by Ciech Group Financing AB is 'B', in line with the corporate 
credit rating. The issue rating is subject to our review of the final 
documentation. We consider that the structural subordination of the notes is 
not material, and is effectively mitigated by an extensive security package.

The notes benefit from a comprehensive guarantee package from the parent and 
subsidiaries accounting for more than 90% of consolidated revenues, 95% of 
EBITDA, and 85% of total assets. The noteholders will have first-ranking 
security interests over the assets of all Ciech's subsidiaries except Zachem, 
Transoda Sp. z o.o. and Ciech Finance. This includes security over the 
proceeds loans; the share capital of the issuer and guarantors; as well as 
over real estate, moveable assets, trade, and certain bank accounts. 

In light of Ciech's asset disposal strategy, the notes' documentation contains 
a covenant specifying that Ciech may use the net proceeds from any asset sale 
for the repayment of senior secured debt, including the proposed notes, as 
well as for reinvestment in capex or permitted businesses. Ciech may use the 
proceeds in this way within the next 12-18 months. Ciech will have to use any 
proceeds that it does not use for the aforementioned purposes to buy back the 
proposed notes and any other pari passu ranking debt at par.

The creditors under the RCF will share the collateral on a super priority 
basis and on a pari passu basis with the creditors under the new domestic 

In terms of the insolvency jurisdiction, any insolvency proceedings against 
Ciech would most likely originate in Poland. Although we have assigned an 
issue rating to the EUR225 million notes, we have not assigned a recovery rating
because our review of Poland's insolvency regime is not complete.

The stable outlook reflects our view that Ciech's liquidity will remain 
"adequate" post refinancing and that its soda ash business will continue to 
perform satisfactorily in the fourth quarter of 2012 and in 2013, 
notwithstanding the currently difficult economic climate in Europe. We view an 
adjusted ratio of debt to EBITDA of up to 5x as commensurate with the current 

Ratings upside could arise in 2013 if Ciech maintains satisfactory profits in 
the soda ash business and achieves adjusted debt to EBITDA of less than 4x on 
a sustainable basis. Notably, an upgrade depends on Ciech effectively 
executing its strategy of restructuring, disposing of non-core activities, and 
reducing capex, which are key to our projection of the company deleveraging in 

Rating downside could arise if Ciech was unable to deleverage, leading to 
adjusted debt to EBITDA of more than 5x. We envisage that this could occur if 
margins in Ciech's soda ash business were to deteriorate unexpectedly as a 
result of new capacity additions and/or its inability to dispose of 
underperforming activities. 

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal, unless otherwise stated.
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Principles Of Credit Ratings, Feb. 16, 2011
     -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 
9, 2010
     -- Criteria Guidelines For Recovery Ratings On Global Industrials 
Issuers' Speculative-Grade Debt, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008

Ratings List
New Ratings

Ciech S.A.
Corporate Credit Rating   B(prelim)/Stable/--

Ciech Group Financing AB
 Senior Secured Debt*     B(prelim)

*Guaranteed by Ciech S.A.

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 
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