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Rating Action:

Moody's assigns Ba1 CFR to Evonik Industries AG, Outlook Stable

21 Sep 2010

First-time rating

Frankfurt am Main, September 21, 2010 -- Moody's Investors Service has today assigned a Ba1 Corporate Family Rating (CFR) to Evonik Industries group (Evonik, EI or the group) and Probability of Default Rating (PDR) to Evonik Industries AG, the holding company of a German-based conglomerate encompassing chemicals, energy and real estate businesses. At the same time, Moody's has assigned a Ba1 rating to EUR750 million of Senior Unsecured Notes issued by Evonik Industries AG. The outlook on all ratings is stable. This was the first time that Moody's has rated Evonik Industries AG.

RATINGS RATIONALE

Moody's Ba1 Corporate Family Rating for Evonik reflects the group's (i) strong business profile in chemicals with leading market positions, large scale, wide end-product and end-market diversity with a good mix between more cyclical upstream activities and stable specialty applications, (ii) above average operating margins at the chemicals business supported by the quality and technology content of its products as well as through a good level of vertical integration through selective 'Verbund' structures, (iii) clear strategic path to focus on the group's strong chemical division by partial divestments of the energy and real estate businesses notwithstanding that the successful implementation of this strategy bears execution risk, (iv) focus on optimizing its cost structure through the implementation of various cost initiatives across the businesses to further enhance margin levels notwithstanding that Evonik already generates operating margins in excess of most of its European chemicals peers, (v) strong technology- as well as R&D platform (more than 20% of sales generated from products not older than five years) allowing for a timely response to customer needs and to new market trends, and (vi) strong liquidity profile with currently over EUR1.359 billion in cash on balance sheet as well as access to an undrawn EUR1.5 billion revolving credit facility.

The rating remains constrained by Evonik's (i) leveraged capital structure if compared to investment grade chemicals peers, (ii) aggressive dividend policy (payout ratios was around 100% of net income in FY 2009) which is expected to exert negative pressure on free cash flow generation going forward, (iii) limited exposure to cyclical customer industries such as automotive and construction notwithstanding that the group has no specific concentration on any specific industries, customers or products, (iv) shareholder structure with the cohabitation of a financial investor with a minority stake and a foundation set up in 2007 to wind down the subsidized coal activities of former RAG by 2018, which might have different strategic interests although the execution of the group's strategy since the change in the ownership structure has been smooth and focused.

EI's liquidity position is sound. The group's liquidity is supported by large cash balances (EUR1,359 million at 30th June 2010) and access to a EUR1.5 billion unsecured syndicated revolving credit facility (undrawn at 30th June 2010). Operating cash outlays for the coming twelve months, which comprise mainly capital expenditures, working capital, dividends are expected to be largely covered by operating cash flows. The group's liquidity revolving credit facility contains financial covenants but EI currently enjoys ample headroom under these covenants.

The stable outlook assigned to the rating reflects Moody's expectation that Evonik will continue to focus on deleveraging and will apply discretion in the implementation of its organic growth strategy. The agency's expectation is predicated upon a gradual recovery in chemicals demand across all regions with continued stronger growth patterns anticipated in emerging economies. The strong recovery in emerging market economies have been the main driver of the recovery in the European Chemicals industry. The derailing of emerging economies growth and / or a reversal in the recovery of developed economies, which are concurrently considered as tail risks could invalidate our assumption underlying the assignment of a stable outlook to Evonik.

Continued strong operating performance coupled with prudent balance sheet management and / or proceeds from asset disposals applied to debt reduction leading to Adjusted Net Debt / EBITDA of below 3.5x and RCF / Net Debt of above 15% on a sustainable basis would exert positive pressure on the ratings.

A sharp deterioration in the operating environment and / or shift in the group's organic and external growth strategy leading to sustained negative free cash flow generation and / or a deterioration in Adjusted Net Debt / EBITDA to sustainably above 4.5x would lead to negative pressure on the ratings. The agency would also expect Evonik to maintain RCF / Net Debt in the low double digit to avert negative pressure on the ratings.

The principal methodologies used in rating Evonik Industries AG were Global Chemical Industry published in December 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Evonik Industries AG, headquartered in Essen, Germany, is the holding company of the Evonik Group, an industrial conglomerate encompassing chemicals, energy and real estate businesses. While the roots of the company date back to 1843, the group in its current legal form was established in 2007 when the so-called white division of RAG AG was separated from the mining activities of the group and incorporated under EI. Evonik is majority owned by RAG Foundation, which was set up to fund liabilities relating to the termination of RAG's mining activities until 2018. Funds of the financial investor CVC Capital Partners have acquired a 25,01% stake in EI in 2008. EI reported revenues of EUR13.1 billion and an EBITDA of EUR2 billion for the fiscal year ended 31st December 2009. The company employed 38,361 people at fiscal year-end 2009.

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Frankfurt am Main
Stanislas Duquesnoy
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
David G. Staples
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
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Germany

Moody's assigns Ba1 CFR to Evonik Industries AG, Outlook Stable
No Related Data.
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