RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has upgraded Braskem S.A. (Braskem) foreign and local currency Issuer Default Ratings (IDR) to 'BBB-' from 'BB+' and the national scale rating to 'AA+(bra)' from 'AA(bra)'. The Rating Outlook for the corporate ratings is Stable. A full list of the rating actions is provided at the end of this release.
The rating actions reflect the expectation of ongoing improvements in Braskem's operating cash flow generation and in its strategic position within the petrochemical industry. Fitch expects that Braskem will be able to reduce its leverage to levels more commensurate with the 'BBB-' rating over the short to medium term due to Braskem management's strong commitment to the deleveraging process; new green field projects are expected to be financed through non-recourse project-finance debt, which should aid in the deleveraging processes. Acquisitions may likely continue to play an important role in Braskem's growth strategy, but the company is expected to be selective with its acquisitions, which build geographic diversity or access to competitive raw materials using a conservative capital structure.
Braskem's investment grade ratings are supported by its leading position in the Latin-American petrochemical sector as the sole thermoplastic resin producer in Brazil; and by the ongoing strengthening of its business base within the global petrochemical industry. The financial strategy under which Braskem has been managing its financial profile and refinancing risks given its business exposure to the volatility of the global petrochemical industry cycles are also incorporated into the analysis. Braskem's ratings are also supported by its strong shareholder structure with Odebrecht and Petrobras as its main two shareholders.
Strong Business Profile
Braskem's sizeable operational scale and unique position in the Brazilian market favorable supports its ability to pass through prices within the value chain and to partially mitigate sector volatility. The company's integrated operations and its recently more diversified raw material mix provide it with competitive advantages. During less favorable petrochemical cycles, Braskem has been efficient in obtaining higher and less volatile margins, when compared to its global peers. In the last five years, EBITDA margins have ranged between 13.5% and 16.9%, with an average of 15.0%, which demonstrate its ability to operate effectively in different economic scenarios and petrochemical cycles. Braskem's track record also demonstrates its ability to make acquired assets profitable, maximizing synergies from investments in different acquisitions made over the last few years.
Strong Liquidity Mitigates Short Term Sector Volatility
Braskem's robust liquidity position is a key factor supporting its ratings. Company's management has been adopting a conservative and pro-active financial strategy to limit the risks associated to its business exposure to a cyclic and capital intensive industry. The company has strategically maintained a strong liquidity position and long-term debt life, combined with continuous financial cost reduction. This strategy has provided Braskem with a satisfactory payment profile, even in challenging operating cash generation scenarios or in the event of global credit tightness.
As of June 30, 2011, the company's total liquidity position was BRL3.2 billion, based on BRL2.6 billion of cash and marketable securities and USD600 million of undrawn stand-by credit lines due in 2013 and 2016, without material adverse change clauses. As a result, its short-term debt coverage ratios, and then including additional debt maturities through 2013 are quite strong at 2.0 times and 1.0 time, respectively. Including its cash flow generation (CFFO) of BRL2.6 billion in the last twelve months period ended in June, 30 2011, these ratios increase to 3.4x and 1.6x times, respectively.
Over the same period, Braskem recorded total adjusted debt of BRL14.0 billion, which incorporates the BRL1.5 billion debt with the tax refinancing program (Refis). During 2011, Braskem used the ample liquidity in the international market, carrying out around USD1.3 billion in long-term debt transactions, and extending its debt scheduled amortization profile to an average life of 12.5 years. The financial debt maturing until 2013 amounted to BRL3.6 billion in line with Braskem's strategy to protect its operating cash generation and liquidity for the next three years.
Challenging 2011 Tempers Further Short Term Leverage Reduction
The 19% devaluation of the Brazilian Real recorded in 3Q11 and a more challenging scenario during the quarter should negatively affected the company's consistent de-leveraging process that has been occurring over the most recent quarters. However, Fitch believes that the positive fundamentals for the company's business remain unchanged on the medium term and expects that margins and operational cash flow to benefit with the devaluation of the Brazilian Real. The negative impact of the real devaluation in its financial statements is expected to be a net debt increase around BRL1.2 billion.
During the first semester of 2011, Braskem's operating cash flow generation was negatively impacted by the BRL appreciation, greater competitive pressures from imported products and by the non recurring event (power blackout in the Brazilian Northeast) with an estimated EBITDA loss of BRL230 million. As a result, EBITDA generated during the last twelve months ended in June 2011 (LTM) was BRL4.2 billion, quite stable compared to the BRL4.1 billion reported in 2010.
In June 2011, the leverage ratio as measured by Net Adjusted Debt/EBITDA was 2.8 times (x), which compares to a 3.0x in 2010 and 5.0x at year-end 2009, considering pro-forma figures of acquired assets. For 2011, Fitch expects leverage ratio as measured by Net Debt/EBITDA to move around 2.5x assuming the real remains around BRL1.75/USD. Such expectations are already incorporated into the new ratings; a weaker operational performance in 3Q11 affected by lower prices and competition from imports.
Longer Term Leverage to Decline
Going forward, Fitch believes that Braskem should be successful in resuming its leverage reduction trend as basis the market recovers and the benefits of foreign exchange valuation on Braskem's operating cash generation materialize. Fitch forecasts indicate the company is able to improve its main credit measures in 2012 and 2013. The agency estimates net debt/EBITDA leverage ratio for 2012 close to range between 2.0x - 2.5x, and around 2.0x in 2013, which are key to sustaining the current ratings.
The improvements also incorporate the potential realignment of Braskem's revenues based on international prices, higher level of competition in its exports and the reduction of imports into the Brazilian market. Braskem should also benefit from the expected moderate spread increases in the petrochemical chain for 2012 and 2013, based on higher balance between supply and demand in the global petrochemical industry.
High Exposure to Domestic Market Performance
Braskem's business should benefit from the growth of Brazilian GDP, estimated by Fitch at 3.6% in 2011 and 3.7% in 2012. Around 70% of its revenues are generated in the local market and, therefore, its business should benefit from the expansion of Brazilian economy. In April, 2011, Fitch upgraded the sovereign rating for Brazil to 'BBB', from 'BBB-', with basis, among others, on the Brazilian economy potential sustainable growth and better capacity to absorb external shocks.
Strategic Partnership with Petrobras a Plus
Braskem ratings also benefit from the financial and operational support of its main shareholders, Grupo Odebrecht and Petrobras (Local and Foreign Currency IDR of 'BBB' by Fitch). The national oil & gas company holds a relevant position in the voting capital of Braskem (47%), and is the company's main raw material supplier. Petrobras's active role in Braskem is strategic and reduces risks associated with the business, such as supply shortages and production costs volatilities. Braskem benefits from the supply agreement with Petrobras, which contemplates quarterly price readjustments on a moving average. These commercial conditions allow Braskem higher flexibility to manage more immediate cost pressures in a scenario of naphtha prices increases.
Key Rating Drivers
A greater than expected geographical diversification of its cash flow generation combined with the maintenance of strong financial profile could positively impact the ratings. Braskem's inability to increase its cash flow generation or to reduce leverage may pressure the ratings. In the short-to-medium term, event risk is moderate, yet Fitch expects that the company will carefully manage to adequately fund any possible future acquisitions and/or to finance relevant investments without moving the company's capital structure away from current levels.
Fitch upgrades the following ratings:
Braskem S.A.
--Long-term foreign currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+';
--Long-term local currency IDR to 'BBB-' from 'BB+';
--Long-term national rating to AA+(bra) from 'AA(bra)';
--Unsecured senior notes due 2014 and 2017 to 'BBB-' from 'BB+'.
Braskem International
--Long-term foreign currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+';
--Unsecured senior notes due in 2015 to 'BBB-' from 'BB+'.
Braskem Finance Limited
--Long-term foreign currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+';
--Unsecured senior notes due 2018, 2020 and 2021 to 'BBB-' from 'BB+';
--Unsecured senior perpetual bonds to 'BBB-' from 'BB+'.
Braskem America Finance Company
--Long-term local and foreign currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+';
--Unsecured senior notes due 2041 to 'BBB-' from 'BB+';
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'National Ratings - Methodology Update' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
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