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Announcement:

Moody's confirms Lafarge's Baa3 rating, outlook negative

Global Credit Research - 31 Aug 2010

Approximately EUR 12.5 billion of long-term debt securities affected

Frankfurt am Main, August 31, 2010 -- Moody's Investors Service has today confirmed Lafarge S.A.'s Baa3 issuer rating. The rating outlook is negative. Moody's has also confirmed Lafarge North America, Inc's and Lafarge Cement UK plc's Baa3 issuer ratings .

Today's rating action concludes the review for possible downgrade, which was initiated on 3 August 2010.

"The confirmation was prompted by Moody's expectation that over time, Lafarge's capital structure will move closer to ratios that are in line with an investment grade rating," says Matthias Hellstern, a Moody's Senior Vice President and lead analyst for Lafarge. Moody's is of the opinion that the metrics have been also impacted by cyclical (i.e. a slower recovery in end markets) and exceptional factors (i.e. FX currency impact on the US dollar denominated debt) that have weighed on the metrics, and delayed the path to recovery to target metrics for the rating category by about one year from previous expectations. Lafarge has undertaken meaningful deleveraging measures since 2008, such as a rights issue, reduction of capex, divestments, cost cutting efforts and efficient working capital management, which have been offset to some extent by the decision to increase the dividend payment in 2010. Finally the strong liquidity profile and reasonably balanced debt maturity profile should provide adequate time for the company to recover a stronger financial profile over the next 12 to 18 months.

However, Moody's notes that the company's financial metrics, such as Moody's adjusted net debt/EBITDA (4.8x per end of June 2010), or RCF/net debt (10.1%), are still not in line with the Moody's requirements to retain the investment grade rating. The decision to confirm the rating assumes that over the next 2 years Lafarge's leverage metrics will move constantly to the levels that are required for an investment grade rating, i.e. RCF/net debt close to 20% and net debt/EBITDA at or below 3.5x and that Lafarge will take all measures that are needed to achieve these metrics, even if some of its major markets remain weak going forward. Any material deviation to this trajectory would generate renewed pressure on the rating.

The rating confirmation also takes into account the commitment of Lafarge's management to rigorously work on improving its capital structure and its internal target to achieve an unadjusted FFO/net debt ratio of 28-30% as soon as possible (per LTM June 2010: 15.8%). Moody's believes that Lafarge will strongly benefit from good trading conditions in most of its emerging markets, such as Iraq, South Africa, Algeria or India, which should enable the company to more than offset continued weak trading conditions in its more affected mature markets, such as the US or some markets in Western Europe. The additional contribution from the recently acquired Brazilian assets should also provide Lafarge with a meaningful EBITDA contribution starting from 2011.

Moody's further notes that Lafarge will generate relatively low positive free cash flows, which could be applied to debt reduction (after dividend payment and expansion capex, Moody's expects this to be around half a billion EUR in 2010). Moody's would also expect that Lafarge will use proceeds from asset sales to pay down debt.

With all these measures taken, Lafarge's leverage ratios will improve gradually -- but relatively slowly -- over time and should hit investment grade characteristics by the mid/end of 2012.

Weighing negatively on Lafarge's rating is the relatively high share of minority interests, which as of June 2010 accounted for around 23% of the company's H1 2010 net income.

In contrast to the relatively weak capital structure, Lafarge's short-term liquidity profile for the 12 months from July 2010 is good, based primarily on the group's high and stable balances of cash and marketable securities (of EUR2.7 billion), as well as expected funds from operations. The major external source of liquidity likely to be available -- e.g. in a stress scenario -- is the EUR1.75 billion syndicated long-term credit line, which is unused. Given the absence of a repeating material adverse change (MAC) clause and specific financial covenants, this facility is regarded as providing a high quality of liquidity. Additionally, Lafarge has approximately EUR2.0 billion in unused bilateral and committed credit lines, which, in Moody's opinion have a lower quality, given their bilateral character. However, Moody's takes comfort from the long average maturity of these lines (around 3.1 years). These cash sources are more than sufficient to cover committed cash outflows, such as capex, working capital changes or dividends and should give Lafarge enough breathing space to repair its balance sheet.

Given the weak positioning of Lafarge's rating, a rating upgrade is currently highly unlikely. The rating could be upgraded if Lafarge achieves an RCF/net debt ratio of above 20% on a sustainable basis, and if the net debt/EBITDA ratio would move clearly below 3.5x. An upgrade would also require continued good short term liquidity position.

Negative rating pressure would build if Lafarge's RCF/net debt ratio would fail to improve gradually to a level closer to the mid-teens level in the next 6 - 9 months, clearly above the mid-teens by the end of 2011 and closer to 20% thereafter.

The last rating action on Lafarge was implemented on 16 January 2009 when Lafarge's rating was downgraded to Baa3 with a negative outlook, from Baa2.

The principal methodology used in rating Lafarge was Moody's methodology for the Global Building Materials industry, published in July 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.

Outlook Actions:

..Issuer: Lafarge Cement UK plc

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Lafarge North America, Inc.

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Lafarge SA

....Outlook, Changed To Negative From Rating Under Review

Confirmations:

..Issuer: Lafarge Cement UK plc

....Senior Unsecured Regular Bond/Debenture, Confirmed at Baa3

..Issuer: Lafarge North America, Inc.

....Senior Unsecured Medium-Term Note Program, Confirmed at (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Confirmed at Baa3

..Issuer: Lafarge SA

....Multiple Seniority Medium-Term Note Program, Confirmed at (P)Ba1, (P)Baa3

....Senior Unsecured Bank Credit Facility, Confirmed at Baa3

....Senior Unsecured Regular Bond/Debenture, Confirmed at Baa3

..Issuer: Sugar Creek (City of) MO

....Senior Unsecured Revenue Bonds, Confirmed at Baa3

Headquartered in Paris, France, Lafarge S.A. is one of the leading building materials suppliers globally and one of the three largest cement producers worldwide. Lafarge operates in 78 countries on five continents and generated sales of EUR15.9 billion in 2009.

Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt am Main
Matthias Hellstern
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
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 confirms Lafarge's Baa3 rating, outlook negative
No Related Data.
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