(The following statement was released by the rating agency)
Dec 10 -
Summary analysis -- Braskem S.A. ---------------------------------- 10-Dec-2012
CREDIT RATING: BBB-/Stable/-- Country: Brazil
Primary SIC: Chemicals &
Mult. CUSIP6: 105532
Mult. CUSIP6: 10553H
Mult. CUSIP6: 10553J
Credit Rating History:
Local currency Foreign currency
30-Mar-2011 BBB-/-- BBB-/--
06-Dec-2007 BB+/-- BB+/--
Standard & Poor’s Ratings Services’ ratings on Brazil-based petrochemical company Braskem S.A. are primarily based on its expectations that the company 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 it is committed to an important deleveraging strategy that should allow it to show net debt financial metrics that are more commensurate with our assessment of a “significant” financial risk profile by year-end 2013.
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 it 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 its 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 year-end 2013.
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 (including working capital needs, capital expenditures, and short-term debt) 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 with banks;
-- Absence of restrictive covenants; and
-- Generally prudent financial risk management.
The stable outlook reflects our expectation that the company has the operating and financial flexibility it needs to reach the financial ratios that, in our view, are commensurate with the rating levels. We anticipate that the company’s margins will recover with the start-up of the 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 increase to 20% and net debt to EBITDA of less 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 Braskem’s operating performance does not start to recover as expected by year-end 2012 and the beginning of 2013, making it more difficult for the company to reach the expected deleveraging levels in 2013. We believe that an upgrade is unlikely in the medium term, since we anticipated an important improvement in the credit metrics in our ratings analysis.
Related Criteria And Research
-- Key Credit Factors: Criteria For Rating Companies In The Global Commodity Chemicals Industry, Sept. 19, 2012
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology and Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011