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Rating Action:

Moody's assigns Baa3 rating to Braskem's notes due 2024; negative outlook

16 Apr 2014

Sao Paulo, April 16, 2014 -- Moody's Investors Service has assigned a Baa3 foreign currency rating to the USD 250 million reopening of the senior unsecured notes due 2024 issued by Braskem Finance Limited and fully and unconditionally guaranteed by Braskem S.A.. Proceeds will be used to prepay part of the company's outstanding notes due 2017, 2018 and 2020 and to reduce gross debt. The ratings outlook is negative.

The rating of the proposed notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and assume that these agreements are legally valid, binding and enforceable.

Rating assigned:

Issuer: Braskem Finance Limited

- USD 250 million in senior unsecured guaranteed notes due 2024: Baa3 foreign currency rating

Ratings unchanged:

Issuer: Braskem Finance Limited. (Cayman Islands)

- USD 500 million senior unsecured guaranteed notes due 2018: Baa3 foreign currency rating

- USD 750 million senior unsecured guaranteed bonds due 2020: Baa3 foreign currency rating

- USD 1,000 million in senior unsecured guaranteed bonds due 2021: Baa3 foreign currency rating

- USD 500 million in senior unsecured guaranteed notes due 2022: Baa3 foreign currency rating

- USD 500 million in senior unsecured guaranteed notes due 2024: Baa3 foreign currency rating

- USD 700 million senior unsecured guaranteed perpetual notes: Baa3 foreign currency rating

Issuer: Braskem America Finance Company (Delaware, U.S.)

- USD 750 million in senior unsecured guaranteed bonds due 2041: Baa3 foreign currency rating

The outlook for all ratings is negative.

RATINGS RATIONALE

Braskem's Baa3 rating is supported by its size as the largest petrochemical company in Brazil and in the Americas by production capacity, with historically above industry average operating margins coming from high capacity utilization rates, long-term client relationships, and product customization. The rating also reflects the company's dominant market position in Brazil. Braskem's weakened credit metrics resulting from its poor operating performance in 2011 and 2012, challenging operating environment and from investments in the greenfield Mexican Ethylene project constrain the company's ratings and outlook. Nevertheless, our expectations of gradual margin improvement and leverage reduction are also incorporated in the ratings. The rating also factors in the company's exposure to naphtha and natural gas prices and its dependence on Petrobras for the supply of those inputs. Finally, we regard as credit positives Braskem's above-average level of disclosure, its overall good governance practices and the significant interest of Petrobras and Odebrecht in the company.

In the last twelve months ended December 2013, Braskem's Total Adjusted Net Debt (including refinanced taxes, FIDC, derivatives, pension obligations and considering a minimum operational liquidity cushion of BRL 1.5 billion) to Adjusted EBITDA of 4.4x was high for the rating category, and at the same level of 2011 (4.3x). We acknowledge, however, an improvement from 2012 levels, when leverage peaked 5.3x. Adjusted EBITDA margins reached 12.9% in 2013, a recovery from 2011 and 2012 levels, when margins reached 11.8% and 9.5%, respectively.

We expect Braskem's profitability and leverage to gradually return to levels more commensurate with an investment-grade profile, as the company´s cash flow benefits from government's actions, such as the REIQ measure, enacted in April 2013, which brings material Ebitda benefits to the company. Fixed costs dilution and the additional capacity in PVC and butadiene (both concluded in 2012) should also contribute to the company's results in 2014. The depreciation of the Brazilian Real should continue to benefit Braskem's cash flows offsetting the expected increase in absolute debt levels, as 70% of the company's total debt is denominated in foreign currency, and the expected increase coming from the remaining disbursement of the Mexico project finance debt (USD 3.2 billion total). Braskem's commitment towards the project is limited to its 75% equity participation and contractual obligations.

Meanwhile, Braskem's sound liquidity should provide the company the financial flexibility necessary to ride through industry downturns. At the end of FY2013, the company's cash balance of BRL 4.4 billion covered short term debt by 3.5x. In addition, Braskem has BRL 1.8 billion in committed credit facilities. Divestitures of non-core assets (approximately BRL 1 billion since the end of 2012) also support an improvement in the company's liquidity.

The negative outlook reflects Moody's expectation that Braskem's metrics will remain pressured in the medium term owing to modest growth in key developed markets, which will continue to pressure international spreads, and support imports into Brazil and tight margins for Braskem. Our expectations of weak credit indicators, namely leverage and free cash flow metrics, during the investments in its greenfield ethylene plant in Mexico (75% equity participation) are also incorporated in the negative outlook. A stabilization of the outlook would require Braskem's profitability to return to its historical levels on a sustainable basis, while adjusted leverage gradually decreases.

A rating upgrade is unlikely over the next few years given the current credit metrics. Longer term, the rating could be upgraded if leverage decreases to a level which Moody's considers to be more compatible with the volatile nature of Braskem's cash flows, with Total Adjusted Net Debt (including a minimum cash cushion of BRL 1.5 billion) to EBITDA stabilizing at around 2.5x (4.4x in FY2013). An upgrade would also require that Braskem maintain strong liquidity and Retained Cash Flow (defined as Funds from Operations less Dividends) to Net Debt above 25% (12.3% in the end of 2013).

Negative pressure on the rating could result from weaker operating results or from persistently high leverage, with Total Adjusted Net Debt/Adjusted EBITDA of 3.5x or above and Retained Cash Flow/Total Adjusted Net Debt lower than 15%. Furthermore, the rating could be negatively affected if Braskem assumes substantial risks related to greenfield projects (debt or completion guarantees, etc) or if the level of consolidated secured debt materially increases.

The principal methodology used in rating Braskem was the Global Chemical Industry Methodology published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Braskem S.A. (Braskem) is the largest producer of thermoplastic resins in the Americas, with annual production capacity of some 7.5 million tons including polyethylene, polypropylene and PVC. Braskem also produces caustic soda, chlorine, gasoline and other basic petrochemicals. In 2013 Braskem reported consolidated net revenues of BRL 41 billion (USD 19.2 billion converted by the average exchange rate for the period).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Barbara Mattos, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Marianna Waltz, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Moody's assigns Baa3 rating to Braskem's notes due 2024; negative outlook
No Related Data.
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