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Rating Action:

MOODY'S ASSIGNS A PRIME-1 COMMERCIAL PAPER RATING TO DSM NV.

17 Nov 1998
MOODY'S ASSIGNS A PRIME-1 COMMERCIAL PAPER RATING TO DSM NV. Moody's Investors Service has assigned a Prime-1 rating to DSM NV for its Euro 500 million Euro-Commercial Paper programme. The rating assignment reflects the strong credit strength of the group (Issuer Rating of A2 for DSM NV) as well as the adequate alternate liquidity the company has arranged to fully back-up expected outstandings under the CP programme.


Moody's Prime-1 rating reflects the DSM group's increasing skew towards less volatile, higher-growth fine chemical operations; its leading market positions across a wide range of chemicals; a conservative approach to funding acquisitions; our expectations of an adoption of prudent financial policies; and the group's stable annual cashflow derived from its management of the Dutch State's interest in gas production and distribution. Balancing these positive attributes are the group's continued reliance on a sizable portion of revenues and earnings derived from more volatile, commodity businesses; an anticipated downturn in the polymers sector that will likely adversely impact earnings over the next few years; a strong geographic focus on Europe, which leads to susceptibility to a downturn in the European economies; and a leading presence in penicillins, which in the near term will likely continue to face pricing pressures due to over-supply from Asian producers.


Over the last few years, DSM has steadily built up its presence in fine chemicals, growing both organically as well as through small-medium sized acquisitions, building leading market positions in sectors such as artificial sweeteners (aspartame), antibiotics, and a number of exclusive intermediates for pharmaceuticals. Most recently, this growth culminated with the more significantly-sized acquisition of Gist-Brocades, a leading global supplier of bakers yeast, penicillin, along with associated derivatives, for the pharmaceutical industry, as well as enzymes for the foodstuffs and animal feed industries. In the short-term, there will continue to be pressure on penicillin prices and margins driven by excess production in countries such as India and China. Moody's believes, however, that the end-markets for most of Gist-Brocades' products, in particular for food specialties and pharmaceutical intermediates, are fairly high-growth and rather non-cyclical, the former driven by strong demand for foodstuffs with improved texture and nutritional value, and the latter by increased outsourcing by pharmaceutical companies for their intermediates production. Gist-Brocades is a world leader in enzyme technology and within the infrastructure of the DSM group is expected to grow its competitive position in this sector in the coming years.


In DSM's core business cluster of polymers and industrial chemicals, the group holds a favorable European cost-position in the production of polyethylene, driven by the large scale of its production sites in the Netherlands and Germany and its 100% integration with its ethylene supply. DSM is, however, less cost-competitive in its polypropylene business, and only has a small position in one of the faster-growing plastics, linear-low density polyethylene. Furthermore, Moody's believes that industry over-capacity, derived in part from lower-cost production in the Middle-East, along with slowing global growth rates, will pressure prices and margins in the polymers business over the coming few years. Meanwhile, in the high-growth engineering plastics businesses, DSM holds largely second-tier positions and will likely face significant competition from some of the larger established players such as GE Plastics, BASF, and Bayer.


DSM's recent acquisition of Gist-Brocades for NLG 2,750 million was funded to 40% by the issuance of 5.4 million new DSM shares and underlines the group's conservative approach to financing acquisitions. Moody's acknowledges other prudent financial measures adopted by the company including a conservative dividend policy with payout linked to operating cashflow generation and careful management of capital investment programmes that have been sharply restricted going into industry downturns. Moody's anticipates a continuation of the Group's conservative approach to managing its finances which should limit the downside to debt protection measures despite an expected deterioration in profit margins driven by weak profitability in the polymers and industrial chemicals business in the intermediate term. Prudent financial management coupled with a stable cash-flow annuity of about NLG 140 million per annum from EBN, the Dutch State's gas production and distribution arm, is expected to support strong cashflow/debt protection measurements through an economic cycle. Moody's believes the group has adequate back-up liquidity to support outstandings under the commercial paper programme.


DSM N.V. is the parent company of a diversified chemicals and life science products group based in Heerlen, the Netherlands, with a consolidated 1997 turnover of NLG 12.4 billion.

No Related Data.
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