(The following statement was released by the rating agency)
Oct 05 - =============================================================================== Summary analysis -- Clariant AG ----------------------------------- 05-Oct-2012 =============================================================================== CREDIT RATING: BBB-/Negative/A-3 Country: Switzerland Primary SIC: Chemicals & allied products, nec Mult. CUSIP6: 18047P =============================================================================== Credit Rating History: Local currency Foreign currency 14-Mar-2008 BBB-/A-3 BBB-/A-3 23-Aug-2007 BBB/A-3 BBB/A-3 =============================================================================== Rationale
The ratings on Switzerland-based specialty chemicals manufacturer Clariant AG reflect Standard & Poor's Ratings Services' view of the company's "satisfactory" business risk profile and "significant" financial risk profile.
Clariant's "satisfactory" business risk profile is underpinned by our view of its wide product range of industrial and consumer specialties and pigments used in paints, dyes, and plastics. It also has leading market positions in leather and textile chemicals, surfactants, and bleach activators for detergents. We also factor in the positive impact of the 2011 Sud-Chemie acquisition, which has added catalyst and adsorbents businesses to Clariant's portfolio. In our view, this enhances its diversity and exposure to more stable end markets with higher margins and growth rates. Other positive factors include Clariant's strongly improved profitability over the past 18 months. Furthermore, the company has a global geographic reach: 36% of second-quarter 2012 sales were in Europe, 13% in North America, 25% in Asia-Pacific, 16% Latin America, and 10% in the Middle East. Nevertheless, we still view as negative Clariant's poor historical profitability and its subsequent sizable and ongoing restructuring to improve results. Other main weaknesses, in our view, are the chemicals industry's cyclicality and margin sensitivity to economic conditions.
Our assessment of Clariant's financial risk profile as "significant" chiefly reflects the issuer's deteriorated credit ratios following the Sud-Chemie acquisition and our view that deleveraging will occur only during 2013 if the company is successful in improving free cash flow and/or realizing planned divestments. We see as relative strengths Clariant's currently adequate liquidity, even though debt maturities are still somewhat concentrated in 2013-2014, mitigated by its high cash balances. We also view as positive management's financial track record and its focus on cash generation.
S&P base-case operating scenario
Our 2012 base case now assumes slightly negative sales-volume growth for the sector, following a deteriorated economic outlook for Europe for the second half of 2012 and 2013. Our scenario factors in the eurozone entering a new period of recession, with GDP contracting by 0.8% this year and flat in 2013.
We continue to expect a strong Swiss franc-euro exchange rate, as seen in first-half 2012, and a reversal to midcycle margins. These factors led to a downward revision of our 2012 estimate of EBITDA before exceptional items of now only approximately Swiss franc (CHF) 940 million (about EUR783 million) compared with our previous assumption of CHF1 billion on sales exceeding CHF7.7 billion. These figures include full consolidation of the Sud-Chemie acquisition.
We expect that the full benefit of the company's ongoing cost-reduction and network-optimization program, as well anticipated synergies from the Sud-Chemie acquisition, will likely only be visible in 2013.
S&P base-case cash flow and capital-structure scenario
We anticipate that in 2012 Clariant will generate funds from operations (FFO) of about CHF500 million and slightly negative free operating cash flow under our credit scenario. We forecast unadjusted net financial debt of about CHF1.9 billion at the end of 2012, or CHF2.7 billion after our adjustments. We consequently forecast that the ratio of adjusted FFO to debt will remain close to 20% in 2012. Under our credit scenario, we project this ratio will recover toward 30% in 2013, assuming the company is successful in improving EBITDA and reducing debt.
We assess Clariant's liquidity position as "adequate" as defined in our criteria. The ratio of liquidity sources to liquidity needs exceeds 1.2x over the next 12 months.
Liquidity sources as of June 30, 2012, consisted of:
-- CHF1.1 billion in cash and equivalents, CHF150 million of which we treat as tied to the operations;
-- No committed bank lines, as the company's policy is to retain surplus cash of at minimum CHF400-500 million at all times; and
-- FFO of about CHF500 million. In addition, Clariant's liquidity has benefited from proceeds of CHF425 million domestic bonds in two tranches (CHF250 million and CHF175 million) placed in August 2012 that have maturities of six and 10 years, respectively.
This compares with liquidity uses over the next 12 months of CHF1.7 billion, including:
-- About CHF1.1 billion of short-term maturities, including about CHF375 million relating to short-term working capital facilities (which have been continuously rolled over, according to management) and EUR600 million (CHF708 million) due in April 2013; the next important maturities are the CHF283 million convertible bond in July 2014 and CHF320 million German Certificate of Indebtedness in October 2014.
-- Assumed modest working-capital outflows; -- Investments of about CHF350 million; and -- Announced dividend payments of CHF89 million. Outlook
The negative outlook reflects the continued possibility of a one-notch downgrade of the long-term rating on Clariant over the next quarters in view of the deteriorated economic macro environment and the recent downgrades of GDP growth forecasts for 2012 in Europe and Asia-Pacific. We therefore see a risk that future deleveraging and improvement in credit metrics in 2013 could remain below our previous expectations. For 2012, we anticipate that adjusted FFO-to-debt ratios will for instance be well below the 30% that we see as consistent with the ratings.
A downgrade would hence be likely if Clariant's performance suffers more than we anticipated in the next quarters, such that 2012 EBITDA before exceptional items falls below our current base-case assumption of CHF940 billion. We could also lower the ratings in first-quarter 2013 if we perceived the expected improvement in 2013 credit metrics as too little or too uncertain.
On the other hand, we would consider revising the outlook to stable if management's strategy update in February 2013 provided us with sufficient visibility that further structural improvements in profitability from ongoing restructuring and synergies from Sud-Chemie would result in EBITDA growth as well as stronger free cash flow in 2013. The other stabilizing factor relates to management's ability to reduce debt by delivering on the announced disposal plans of noncore business units (textile and paper chemicals, and emulsions).
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Methodology and Assumptions: Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business and Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008
-- The Eurozone's New Recession--Confirmed, Sept 25, 2012