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Rating Action:

Moody's places BASF's A1 rating under review for a downgrade

12 Jul 2019

Frankfurt am Main, July 12, 2019 -- Moody's Investors Service ("Moody's") has today placed the A1 senior unsecured notes ratings and (P)A1 senior unsecured MTN programme rating of BASF (SE) (BASF or "the company") and its guaranteed subsidiary BASF Finance Europe NV on review for downgrade. It has also placed under review for downgrade the A1 unsecured rating of revenue bonds guaranteed by BASF. 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 rating under review from stable.

The full list of affected ratings is included in the end of the press release

RATINGS RATIONALE

Today's rating action has been primarily driven by a profit warning that BASF published on 8 July 2019 that indicated that the company had significantly underperformed in the second quarter of 2019 compared to its own expectations. This warning comes at the time when BASF was already fairly weakly positioned in the A1 rating category. While Moody's expected a weakening of the operating performance, the actual performance is clearly below Moody's expectations.

BASF estimates its reported EBIT before special items for the second quarter of 2019 to be EUR1.0 billion, or 47% below the figure for the same quarter of the previous year. Significantly weaker-than-expected industrial production was one of the drivers of the underperformance. The company specifically mentioned the weakness in the global automotive industry, especially in China, and primarily weather-driven decline in agriculture sector in North America, further exacerbated by trade conflicts between the US and China.

Concurrently, BASF significantly revised its outlook for 2019. The company now anticipates considerably lower EBIT before special items of up to 30% below the prior-year level, which compares to the previous forecast of a slight increase of 1--10%. For sales, BASF now expects a slight decline compared with the full year 2018 (previous forecast: slight sales growth of 1--5%).

Although the company has not disclosed more details about the Q2 results and the outlook beyond 2019 at this point, with the updated guidance Moody's sees a rising uncertainty, that BASF could finish 2019 with credit metrics below the agency's expectations for an A1 rating. More specifically, Moody's expects a ratio of adjusted retained cash flow (RCF)/net debt of at least 25% to preserve the A1 rating category, which compared to a ratio of around 20% the company achieved for the 12 months ending March 2019.

The rating agency will focus its review process on the assessment of BASF's ability and willingness to restore the credit metrics towards Moody's expectation for A1 rating in the next 12-18 months, also considering the state of economic cycle and potential more longer term structural challenges in BASF's core markets. Among others, the agency will assess BASF's: (1) willingness to consider suitable measures to support weakened cash flow generation, while proactively managing its debt maturities; (2) scope, likelihood and timing for disposals of non-core assets, including its 73% stake in Wintershall Dea GmbH (Baa2 stable), the construction chemicals business or the pigments business, as well as the application of the disposal proceeds; (3) execution risk and timing related to its excellence performance improvement programme aimed to achieve EUR2 billion annual EBITDA contributions from 2021 onwards; and (4) relative performance compared to its main peers and prospects for a recovery in the most affected end markets.

A downgrade, if any, is likely to be limited by one notch. As a result, Moody's has affirmed BASF's P-1 short-term ratings.

WHAT COULD CHANGE THE RATING UP/DOWN

The A1 rating would come under pressure should BASF fail to generate positive FCF and reposition its retained to cash flow (RCF) to net debt metric close to 30% on average over the cycle. In addition, a large debt funded acquisition and/or increased cash distributions to shareholders leaving RCF to net debt below 25% for an extended period of time would likely result in a rating downgrade.

Although unlikely at this juncture, a marked improvement in underlying operating profitability and cash flow generation together with the maintenance of highly conservative financial policies supporting some permanent debt reduction and sustained strengthening in credit metrics, including RCF to net debt sustainably above the mid-40s in percentage terms, would support a rating upgrade.

LIST OF AFFECTED RATINGS

..Issuer: BASF (SE)

Affirmations:

....Commercial Paper, Affirmed P-1

....BACKED Revenue Bonds, Affirmed P-1

On Review for Downgrade:

....Senior Unsecured Medium-Term Note Program, Placed on Review for Downgrade, currently (P)A1

....Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently A1

....BACKED Revenue Bonds, Placed on Review for Downgrade, currently A1

Outlook Action:

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

..Issuer: BASF Finance Europe NV

On Review for Downgrade:

....BACKED Senior Unsecured Medium-Term Note Program, Placed on Review for Downgrade, currently (P)A1

....BACKED Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently A1

Outlook Action:

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

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.

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 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

No Related Data.
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