Frankfurt am Main, October 09, 2019 -- Moody's Investors Service has today downgraded to A2 from A1 the senior
unsecured notes ratings of BASF (SE) ("BASF"), its guaranteed
subsidiary BASF Finance Europe NV as well as the unsecured rating of revenue
bonds guaranteed by BASF. The senior unsecured MTN programme rating
of BASF (SE) was downgraded to (P)A2 from (P)A1. Concurrently,
Moody's has affirmed the short-term P-1 rating of BASF's
commercial paper programme and the issued commercial papers as well as
the guaranteed revenues bonds. The outlook for both entities has
been changed to stable from rating under review. This rating action
concludes the rating review Moody's initiated on July 12,
2019.
The full list of affected ratings is included at the end of the press
release.
"The A2 rating continues to reflect BASF's position as one
of the world's largest chemicals groups and its leading market position
in many of its product groups. This is balanced against the evolving
business profile as the company is divesting its oil & gas,
pigments and construction chemicals activities leaving a narrower focus,"
said Mr. Martin Kohlhase, a Moody's Vice President
-- Senior Credit Officer and lead analyst for BASF. He added
that "the A2 rating also recognizes the variability around the timing
of divestitures and the ultimate amount and use of net proceeds.
In the context of BASF's progressive dividend policy, Moody's
expects a more consistent creditor-friendly behaviour as BASF pursues
its divestitures by strengthening its capital structure."
RATINGS RATIONALE
The downgrade to A2 reflects Moody's expectation that BASF's
operating performance will remain subdued in 2020. BASF continues
to face challenges such as price competition, cost inflation,
structurally challenged end markets such as the automotive industry and
increased environmental regulation, including tighter standards
regarding the emission of CO2. The anticipated receipt of significant
disposal proceeds in 2020 will in itself not offset the weak profitability,
but help to fund organic growth such as BASF's seventh Verbund site
in southern China, to pay its progressive dividend and to strengthen
its capital structure.
Following scheduled plant turnarounds and also weaker end market demand
stemming from China and the automotive market, BASF has guided towards
2019 EBIT before special items up to 30% lower than 2018.
Moody's expects global light vehicle sales to further decline in
2020 by 0.9% after an expected decline in 2019 by 3.8%.
The automotive sector contributes almost 20% of group sales and
will thus limit a meaningful profitability recovery in 2020.
The rating agency also flags that structural challenges, such as
increased environmental regulation and changing consumer behavior towards
one-use plastics, will negatively affect the revenue generation
and result in higher costs, in particular for base chemicals and
plastics that account for more than 20% of revenues. Although
BASF plans to grow in a CO2-neutral way until 2030, Moody's
nevertheless expects additional costs as a result of further regulation.
The German government, for instance, in late September agreed
a new emissions trading system that will see the introduction of price
increases for CO2 certificates and could result in additional costs,
although not significant to the group overall. The other meaningful
structural challenge is cost inflation and the competitive pricing pressure.
This will in Moody's calculations reduce the EUR2.0 billion
benefits from BASF's most recent efficiency and restructuring programme
after implementation costs of between EUR0.8bn and 1.1bn.
Free cash flow (FCF) generation from 2021 to 2024 will be more constrained
due to peak capital investments for the spending on BASF's seventh
Verbund site in China that will require capital expenditures of up to
$10 billion until 2030. In addition, management has
reiterated its progressive dividend policy that foresees annual increases
of dividend payouts. As a result, Moody's expects moderate
FCF generation of nearly EUR200 million by 2021, with the ability
to deleverage principally stemming from cash proceeds from divestments.
BASF has earmarked three larger assets -- its 72.7%
holding in Wintershall Dea GmbH (Baa2 stable), and its pigments
and construction chemicals activities -- for divestment that will
result in significant net disposal proceeds in 2020 alone.
BASF's liquidity continues to be supported by annual funds from
operations of around EUR7.5 billion and cash holdings of EUR2.1
as of end of June2019. The company has access to a EUR6.0
billion committed revolving credit facility maturing 2024 with two one-year
extension options. Moody's expects that proceeds from divestitures
in 2020 and 2021 will be partially paid out to shareholders via share
buybacks, which is one of the cash uses guided by management,
though with the lowest priority. Although capital investment has
been reduced for 2019 and 2020 owing to the weaker market environment,
BASF is expected to increase capex from 2021 onwards as it embarks on
the construction of its new Verbund site. The associated peak investment
period 2021-2024 will result in higher cash consumption.
RATIONALE FOR STABLE OUTLOOK
The stable outlook takes into account Moody's expectation of a gradual
recovery of EBITDA margins to mid-teens (%) and the successful
execution of its three main divestures slated for 2020. The stable
outlook also reflects Moody's expectation that BASF will be taking
steps to strengthen its financial profile in line with Moody's guidance
for the A2 rating, including debt/EBITDA between 2.5x-3.0x.
This assumes an appropriate balance between shareholder distributions
and debt reduction when considering use of proceeds from upcoming disposals.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Moody's could upgrade ratings to A1 if BASF improves its EBITDA
margin to levels of around 15%, achieves an RCF to net debt
ratio of at least 30% on average through the cycle and sustainably
maintains debt to EBITDA below 2.5x. Moody's could
downgrade ratings if RCF to net debt were not to improve towards 25%
and if gross leverage is sustained above 3.0x.
LIST OF AFFECTED RATINGS
..Issuer: BASF (SE)
Affirmations:
....Commercial Paper, Affirmed P-1
....BACKED Revenue Bonds, Affirmed P-1
Downgrades:
....Senior Unsecured MTN Program, Downgraded
to (P)A2 from (P)A1
....Senior Unsecured Regular Bond/Debenture
(Local/Foreign Currency), Downgraded to A2 from A1
....BACKED Revenue Bonds, Downgraded
to A2 from A1
Outlook Action:
....Outlook, Changed To Stable From
Rating Under Review
..Issuer: BASF Finance Europe NV
Downgrades:
....BACKED Senior Unsecured MTN Program,
Downgraded to (P)A2 from (P)A1
....BACKED Senior Unsecured Regular Bond/Debenture
(Local/Foreign Currency), Downgraded to A2 from A1
Outlook Action:
....Outlook, Changed To Stable From
Rating Under Review
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Chemical Industry
published in March 2019. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
COMPANY PROFILE
Based in Ludwigshafen, Germany, BASF (SE) is one of the world's
largest chemicals groups by revenue. In 2018, it reported
EBIT before special items of around €6.4 billion on sales
of around €62.7 billion, which is equivalent to a margin
of 10.2%.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
Martin Kohlhase
VP - Senior Credit Officer
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
