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Announcement:

Moody's changes its outlook on Rhodia to positive (CFR: Ba3)

13 Sep 2010

Approximately EUR 1.6 billion of rated outstanding debt affected

Frankfurt am Main, September 13, 2010 -- Moody's Investors Service has today changed the outlook on all ratings of Rhodia (CFR: Ba3) to Positive from Stable. All ratings of the group remain unaffected.

The change in the outlook was prompted by continued strong operating performance and good control of cash generation in Q2 2010 as well as improved earnings expectations for the second half of 2010 compared to our expectation at the beginning of fiscal year 2010. In Q2 2010, Rhodia reported revenues of EUR1,330 million (+35% year-on-year, +13% on sequential basis) and a recurring EBITDA of EUR226 million (+104% year-on-year, +2% on a sequential basis). The solid operating performance of Rhodia was supported by good volume growth leading to higher capacity utilization but also by strong pricing power with a EUR66 million positive delta between selling price and raw material price increases in Q2 2010 (cumulative delta of price increases over input cost increases amounted EUR317 million over the last four quarters). Rhodia has been able to capitalize on a very tight supply / demand balance in polyamide 6.6 following efforts led by all polyamide industry players to reduce production capacity in the entire value chain during the latter part of 2008 and 2009. In addition Rhodia continued to benefit from its high exposure to emerging economies, which led the early recovery in demand for chemicals intermediates and specialties over the last four to five quarters. As a result Rhodia's positioning within the Ba3 rating category continued to strengthen with RCF / Net debt and FCF / Net debt reaching 22% and 13.5% on an LTM June 2010 basis.

Moody's expects Rhodia to continue to benefit from supportive market conditions in its most cyclical business divisions Polyamide and Silcea during the second half of fiscal year 2010 as supply / demand dynamics will continue to favor suppliers. While volume growth should start to flatten out on a sequential basis the operating profitability of the group should remain high. The group will also benefit from higher CER earnings as Q2 CERs were received late and could not be sold. The acquisition of Feixiang is expected to close in Q4 2010 (subject to regulatory approval). Positive rating pressure would be predicated upon Rhodia's ability to sustain RCF / Net debt in the mid twenties and FCF / Net debt in the low teens throughout fiscal year 2010 offering Moody's more comfort that the group will be able to generate RCF / Net debt and FCF / Net debt in the high teens and mid to high single digits respectively through the cycle. Looking into fiscal year 2011 pressure from higher raw material costs alongside lower sequential volume growth and a fading of the inventory cycle should exert some moderate pressure on operating margins and cash flows as well as on free cash flow generation. The earnings accretion and cash flow contribution from the integration of the recently announced acquisition of Feixiang Chemicals (expected to close in Q4 2010) in 2011 should help compensate any potential moderate shortfall in earnings and cash flows from Rhodia's existing businesses and support debt and cash flow metrics at a level commensurate with a Ba2 rating.

Moody's notes that our recovery expectation for the chemicals industry and hence for Rhodia is predicated upon a gradual recovery in growth 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 positive outlook to Rhodia.

Moody's would consider upgrading the ratings of Rhodia if the issuer continues to demonstrate further strong operating performance in support of its stronger balance sheet position and its ability to sustainably position its FCF / Net Debt in the mid to high single digits and its RCF / Net Debt in the high teens.

Moody's could downgrade the ratings should the operating performance of the Group sustainably deteriorate resulting in negative free cash flow generation, RCF / Net Debt dropping sustainably below 10% and Net Debt / EBITDA increasing above 5.0x on an adjusted basis.

The liquidity profile of Rhodia is strong. The issuer had EUR928 million of cash & cash equivalents on balance sheet and access to a largely undrawn EUR600 million revolving credit facility (EUR540 million undrawn at 30th June 2010). Rhodia has obtained covenant resets for its revolver in April 2009 and currently enjoys comfortable headroom under its covenants further supporting the liquidity situation of the group. The main cash flow needs over the next twelve months (Working Capital, capex, modest dividends) are expected to be covered from operating cash flows. The acquisition of Feixiang (expected to be closed in Q4 2010 for around EUR330 million) will be funded from cash on balance sheet.

The last rating action on Rhodia was on 29 April 2010, when Moody's assigned a provisional (P)B1 rating to EUR500 million 8-years (Non callable 4 years) Senior Unsecured Fixed Rate Notes.

The principal methodology used in rating Rhodia SA was Moody's Global Chemical Industry Rating Methodology, published in December 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Rhodia S.A., headquartered in Paris, France, is a diversified specialty chemicals group with leading market positions in most of its business applications. Rhodia reported consolidated revenues of EUR4.031 billion and a recurring EBITDA of EUR487 million for the fiscal year ended 31st December 2009.

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
An der Welle 5
Frankfurt am Main 60322
Germany

Moody's changes its outlook on Rhodia to positive (CFR: Ba3)
No Related Data.
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