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Global Credit Research - 17 Nov 2010
London, 17 November 2010 -- Moody's Investors Service has today confirmed the A1 senior unsecured
and affirmed the P-1 ratings of BASF SE (BASF) and its guaranteed
subsidiaries and assigned a negative outlook to the ratings.
This concludes the review for downgrade initiated by Moody's on 23 June
2010, following the announcement of the EUR 3.1 billion acquisition
of Cognis GmbH by BASF.
The decision to confirm the A1 ratings reflects the strong and timely
recovery in the operating performance of BASF in 2010 that allowed the
improvement in the financial metrics of the group from the trough levels
reported in 2009. We further expect that strong cash flow generation
in 2010 will allow BASF to reduce the level of additional borrowing required
to support the acquisition. Based on the performance reported for
the 9 months of 2010, we expect that BASF's Retained Cash Flow to
Net Debt metric will likely return to high-30s levels at the end
of 2010, while the full effect of the acquisition on the earnings
and cash flows will only be seen in 2011.
We note a degree of uncertainty around our base case assumptions for the
operating performance next year, that reflects risks associated
with the anticipated slow-down in growth in high-income
countries, lower level of inventory demand and higher volatility
in the raw material prices. The A1 ratings are supported by BASF's
strong market presence in high-growth countries and the benefits
of the diversified portfolio including Oil and Gas. Furthermore,
Moody's regards the Cognis transaction as being supportive of the company's
strong business profile and consistent with its core business strategies.
The negative outlook on the A1 ratings reflects a relatively weak positioning
of the ratings at A1 level, as BASF has increased its debt levels
progressively as a result of acquisitions. Going forward,
the A1 ratings remain conditional upon the ability of the company to manage
its growth strategy, and the acquisition activity that we expect
will likely continue to support BASF's efforts to execute growth,
while also maintaining conservative management of the gross debt levels.
We note, that BASF retains the flexibility to reduce the debt level
in the near term, as it will face EUR 1.4 billion in maturities
in 2011 and a further EUR 3.1 billion in maturities in 2012.
Moody's also assumes that BASF will continue to manage dividend payment
increases in line with the anticipated growth in the earnings and in line
with its existing dividend policy. The stable outlook, therefore,
will require consolidation in the financial position in the medium term,
leading to sustained strong debt coverage metrics with Retained Cash Flow
to Net Debt metric around 40s level and Free Cash Flow to Net Debt in
high teens, trending towards 20s range in periods of low raw material
The rating could be lowered should higher cash distributions and/or further
additional debt-financed acquisitions lead to the Retained Cash
Flow to Net Debt metric falling sustainably towards the low to mid-30s
level. The upgrade of the rating will require a continuing improvement
in operating profitability and cash flow generation combined with the
pursuit by management of conservative financial policies supported by
debt reduction leading to a sustainable strengthening in credit metrics
(including Retained Cash Flow to Net Debt sustainably above mid-40s
BASF maintains a strong liquidity position, supported by sustained
operating cash flow generation, as well as its substantial cash
balances (EUR 2.3 b at the end of September, 2010) including
a further EUR4.3 billion available under its committed facilities.
The last rating action on BASF was implemented on 26 January 2009,
when Moody's downgraded the company to A1 from Aa3 following the completion
of the acquisition of Ciba Holdings. Moody's has subsequently placed
the ratings under review for downgrade on 23 June 2010 following the announcement
of Cognis acquisition.
The principal methodology used in rating BASF was the "Global Chemical
Industry" methodology published December 2009, which can be found
at 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
Based in Ludwigshafen, Germany, BASF is the world's largest
chemicals group by revenues, reporting global sales of around EUR
50.7 billion and EBIT of EUR 3.7 billion in 2009 (EUR 47.4
billion and EUR 6.1 billion for the nine months of 2010).
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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 Investors Service Ltd.
Moody's confirms BASF A1 ratings with negative outlook.
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London E14 5FA
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