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Rating Action:

Moody's affirms HeidelbergCement's rating at Baa3, outlook remains positive

26 Nov 2019

Frankfurt am Main, November 26, 2019 -- Moody's Investors Service ("Moody's") has today affirmed HeidelbergCement AG's ('HC') long term issuer rating at Baa3. Concurrently, Moody's has also affirmed the group's backed senior unsecured rating at Baa3 and the senior unsecured EMTN program rating at (P)Baa3 of HC and HeidelbergCement Finance Luxembourg S.A. The outlook remains positive.

A list of affected ratings is available at the bottom of this press release.

RATINGS RATIONALE

HC's Baa3 rating continues to reflect the group's robust business profile supported by its large scale, good geographical and product diversification as well as the protection from very high barriers to entry to the industry HC operates in. The performance in 2018 and the first nine months 2019 was characterized by 3.1% and 4.4% increase in organic sales respectively, though the top line growth has slowed down in recent quarters and came to a halt in Q3 2019 while the volume growth turned negative. Moody's adjusted EBITDA took a hit from exceptionally high cost inflation in 2018, which is expected to recover in 2019 as the energy cost inflation turns into a tailwind.

Moody's views the company to be on track to achieve the credit metrics commensurate with a Baa2 rating over time, especially given the company's commitment to reduce net leverage (company's definition before IFRS 16) to below 2x by the end of 2020 and its track record of positive free cash flow generation throughout the business cycle.

However, Moody's believes that achieving required credit metrics for a Baa2 rating will take longer than initially anticipated when the positive outlook was assigned in June 2018. While Moody's initial expectation was that a deleveraging towards 3.5x Moody's adjusted gross leverage and 25% Moody's adjusted retained cash flow/net debt would occur already by the end of 2019, the current expectations assume that these triggers will only be met by the end of 2020. At the same time, there is still a considerable uncertainty regarding the future macroeconomic development and the ability of the Building Materials sector to continue demonstrating resilience when the early cyclical sectors are already heavily impacted by the global economic slowdown.

In addition to somewhat weaker than expected earnings development, which was additionally negatively affected by IFRS 16 implementation compared to Moody's previous adjustment for operating leases, the company is yet to reduce its debt load. While by the end of this year Moody's adjusted net debt is expected to be down €1.2 billion since year-end 2017 driven by positive free cash flow generation and almost €1 billion in proceeds from asset disposals, HC's gross debt remained little changed. The redemption of upcoming bond maturities in 2020/21 would allow reducing Moody's adjusted gross leverage to the required 3.5x level and also enhance the company's free cash flow generation by saving interest payments on high coupon bonds coming due in the next four quarters.

RATIONALE FOR POSITIVE OUTLOOK

The positive outlook on HC's rating reflects Moody's expectation that the company will continue to focus on deleveraging over the next 12 months, progressing not only on net, but also on gross leverage reduction, which would translate into a Moody's-adjusted gross leverage ratio of around 3.5x.

WHAT COULD MOVE THE RATINGS - UP

Positive rating pressure could arise if:

• Moody's adjusted retained cash flow/ net debt improves towards 25% and

• Moody's adjusted gross debt/EBITDA declines towards 3.5x

WHAT COULD MOVE THE RATINGS -- DOWN

Conversely, negative rating pressure could arise if:

• Moody's adjusted retained cash flow/net debt drops sustainably below 20% and

• Moody's adjusted gross debt/EBITDA deteriorated to above 4x

LIQUIDITY

HC's liquidity is solid. The group had around €2.74 billion in cash and cash equivalents on balance sheet as of 30 September 2019 and an undrawn €3 billion revolving credit facility (RCF). Highly positive free cash flow in Q4 19 and cash on balance sheet are more than sufficient to repay €2bn of bonds in Q4 2019 (€500 million) and H1 2020 (€1.5 billion). Moody's currently does not expect HeidelbergCement to refinance these liabilities, which would indicate that the company is likely to use cash at hand and rely on its commercial paper programme to finance capex, dividend payments and working capital outflows in the first half of 2020.

ESG CONSIDERATIONS

Environmental considerations are a material factor in this rating action. HC is exposed to a stricter regulation of CO2 emissions, especially in regards to Phase IV of the EU Emission Trading System (ETS) that will run from 2021 to 2030. However, given the company's broad regional diversification, its large amount of existing emission allowance in the EU that would cover its CO2 emission until 2022 and HC's commitment to reduce its CO2 emission by 30% by 2030, Moody's does not expect environmental issues and the energy transition to have a significant adverse effect on the company's operating and financial performance in the next 12-18 months.

LIST OF AFFECTED RATINGS

..Issuer: HeidelbergCement AG

Affirmations:

....Long-term Issuer Rating, Affirmed Baa3

....Senior Unsecured MTN Program, Affirmed (P)Baa3

....Other Short Term, Affirmed (P)P-3

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Action:

....Outlook, Remains Positive

..Issuer: HeidelbergCement Finance Luxembourg S.A.

Affirmations:

....Backed Other Short Term, Affirmed (P)P-3

....Backed Senior Unsecured MTN Program, Affirmed (P)Baa3

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Action:

....Outlook, Remains Positive

..Issuer: Italcementi Finance S.A.

Affirmation:

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Action:

....Outlook, Remains Positive

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Building Materials published in May 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

HeidelbergCement AG is one of the world's largest heavy building material producer and the world leader in aggregates, with strong market positions in mature Western European countries, such as Germany, Scandinavia, Benelux and the UK, but also across emerging markets of Eastern Europe as well as in the US, Canada, Africa and Asia. HC generated €19 billion revenue in the last twelve months to September 2019. The company is listed on the German stock exchange with around €13 billion market capitalisation. Its major shareholder is Mr. Ludwig Merckle, who owns a 26.7% stake in the company.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Vitali Morgovski, CFA
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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