Overview -- 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 debt. -- 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. Rationale 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 companies. -- "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 electricity. 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. Liquidity 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 notes. 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. Outlook 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 rating. 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 2013. 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, 2012 -- 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. 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