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Rating Action:

Moody's changes outlook on Holcim's Baa2 rating to negative

07 Apr 2014

Frankfurt am Main, April 07, 2014 -- Moody's Investors Service, ("Moody's") Moody's has today affirmed the Baa2 long-term and Prime-2 short-term ratings of Holcim Ltd and its rated subsidiaries and changed the outlook on all ratings to negative from stable following Holcim's announcement of an exchange offer to merge with Lafarge SA (Ba1/RUR) .

"The merger of Holcim and Lafarge will create the largest and geographically most diversified cement producer worldwide resulting in a very strong business profile and offering sizable synergy potential," says Falk Frey, Senior Vice President and lead analyst at Moody's for Holcim. "However, the weaker capital structure of Lafarge and the execution risks resulting from the complexity of the merger weigh negatively on the Baa2 ratings of Holcim and consequently triggered the outlook change to negative," Frey added.

RATINGS RATIONALE

Holcim and Lafarge will merge the two companies by way of Holcim to make a public offer for all outstanding shares of Lafarge with new Holcim shares through an exchange ratio of 1:1. No cash consideration is being made therefore there will be no impact on the capital structure. The merger is supported by the anchor shareholders of Holcim (T. Schmidheiny 20.11%) and Lafarge (Groupe Bruxelles Lambert 20.9% share/ 27.4% voting rights, NNS Holding Sárl 13.9% shares / 19.9% voting rights). The new shares will be listed in Zurich and Paris. Pre-condition for a successful public exchange offer is the approval from Holcim's extraordinary general meeting to issue new Holcim shares by a minimum 2/3 majority of shareholders in attendance. In addition at least 66.67% of outstanding Lafarge shares have to accept the offer. Also the relevant regulatory approvals have to be obtained.

Moody's expects that Holcim and Lafarge will be required to dispose of a sizable amount of assets in various countries to comply with requirements of antitrust authorities. Moody's anticipates that the proceeds from the disposals would be used to reduce debt at the merged group and thus mitigate the negative impact on Holcim's leverage from the combination with Lafarge which exhibits higher leverage than Holcim. Moody's estimates Lafarge's adjusted Debt/EBITDA for 2013 of 5.4x compared with Holcim's Debt/EBITDA of 3.1x for 2013.

Moody's generally views the strategic rationale of the planned merger as positive as the merged group will have an even more geographically balanced presence than Holcim and Lafarge on a stand-alone basis. This business profile should provide a better resilience to cyclical swings in demand for cement, aggregates and ready-mix concrete in individual countries. Nonetheless, the merged company will remain exposed to the cyclicality of the cement and aggregates industry.

In addition, the merger bears the potential for a sizable amount of synergies to be generated over time although leading to upfront expenses and cash outflows. Moody's also positively notes that the proceeds from the significant asset disposal program will be used to repay debt thus mitigating the negative impact from the combination with Lafarge, which exhibits higher leverage, and, hence, a weaker capital structure.

The rating also takes into account the immense challenges related to the timely execution of the merger especially the asset disposal process and the possible price realisation for the disposed assets which could have a material impact on the financial metrics of the merged entity. Other challenges will be the realisation of the identified synergies and the timeline of the savings to be generated as well as the combination of two businesses with somewhat different business cultures.

LIQUIDITY

The liquidity position of Holcim is solid. The group had around CHF2.2 billion of cash on balance sheet at 30 December 2013 and nearly CHF5.0 billion availabilities under its long term committed revolving credit facilities (which do not include any repeating MAC clauses or any financial covenants). Alongside still healthy operating cash flow generation expected over the next twelve months this should be more than sufficient to cover main liquidity uses consisting of working cash (Moody's typically assumes 3% of revenues), capital expenditure, working capital requirements, scheduled debt repayments and dividends.

Holcim has a well spread maturity profile with an average maturity of around 5 years.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook on Holcim's Baa2 ratings reflects the uncertainties on the timely execution and successful realization of the merger in particular (1) the successful sale of the identified assets (2) uncertainties regarding the price realisation on the disposals (3) execution risks on the achievement of the targeted synergies with respect to the calculated amount and the timing and (4) concerns that the relatively optimistic assumptions for future performance might not materialise.

WHAT COULD CHANGE THE RATING -- DOWN/UP

An upgrade of Holcim's Baa2 rating is unlikely over the next 12-18 months. However, the ratings could be upgraded in case of (1) realization of synergies beyond the anticipated CHF1.2 billion by 2016; (2) higher than expected cash inflow from the planned asset disposals within the anticipated time frame until Q1 2015 as part of the merger process and (3) an operating performance and profitability improvements driven by volume growth and cost synergies of the newly formed group evidenced in RCF / Net debt to reach at least 25% by 2015 and beyond and a reduction of the Debt/EBITDA ratio to below 3.0x by 2015 and beyond.

Moody's would consider downgrading Holcim if (1) the timeline of the integration and achievement of synergies or realization of asset disposal valuation would fall materially behind expectations or (2) legal and/or regulatory requirement would lead to a significant change in the current merger plan; (3) such events as well as weaker-than-expected performance which would result in the inability of the company to achieve RCF / Net debt of around 20% by 2015 the latest which has to be sustained over the following years.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was the Global Building Materials Industry published in July 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Jona, Switzerland, Holcim is one of the world's leading cement and aggregates producers. Additional activities include ready-mix concrete, asphalt and a range of other services. At end of December 2013, the group's annual cement production capacity amounted to 206 million tons. The group generated revenues of CHF19.7 billion in 2013.

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.

Falk Frey
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's changes outlook on Holcim's Baa2 rating to negative
No Related Data.
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