RIO DE JANEIRO--(BUSINESS WIRE)--Recent initiatives announced by the Brazilian government to support the competitiveness of the local chemical industry through lower taxes should marginally improve the profitability and operating cash flow generation of Braskem. Nevertheless, Fitch believes the expected change in Braskem's cash flow will not be sufficient to materially lower the company's leverage, which is high for the rating category. As a result, Braskem remains at risk of a rating downgrade in the near-to-medium term if a deleverage does not occur.
Braskem has not been able to reduce its leverage to levels expected by Fitch. In Fitch's base case for the current rating category, it had factored in non-core asset sales of about BRL1.5 billion by Braskem by the end of 2012 and the first quarter of 2013, which would have lowered Braskem's leverage to below 3.5x. As of March 31, 2013, Braskem had sold only BRL652 million of assets. Most of the proceeds from this sale will be received in the second half of 2013.
Fitch had also incorporated in its base case rating the scenario that Braskem's operating cash flow would improve in 2013 as a result of these anticipated government incentives together with those announced at the end of 2012. The 2012 measures included the termination of tax incentives that states were giving to imported products. Combined, divestments of BRL1.5 billion plus increasing cash flow was anticipated to lower Braskem's net leverage to about 3.0x.
As per Fitch's calculation, the announced tax reduction of 4.6% on raw materials such as naptha, which combined represent 52% of Braskem's cost of goods sold (COGS), along with the 9.25% tax reduction for propylene, which represents an additional 8% of COGS, should increase operating cash flow by about BRL650 million in 2013 and BRL1 billion annually in 2014 and 2015. While positive, these improvements on a stand-alone basis would not be sufficient to reduce leverage to 3.0x or below by the end of 2013. On a pro forma basis, considering the cash flow increase due to the tax reductions and the receipt of BRL652 million from the asset sale, Braskem's net leverage should be around 3.6x by the end of 2013. Absent other assets sales or operation improvements, the probability of a future downgrade for Braskem still remains.
Fitch currently rates Braskem as follows:
Braskem S.A.
--Long-term foreign currency IDR 'BBB-';
--Long-term
local currency IDR 'BBB-';
--Long-term national rating 'AA+(bra)';
--Unsecured
senior notes due 2014 and 2017 'BBB-'.
Braskem International
--Long-term foreign currency IDR 'BBB-';
--Unsecured
senior notes due in 2015 'BBB-'.
Braskem Finance Limited
--Long-term foreign currency IDR 'BBB-';
--Unsecured
senior notes due 2018, 2020 and 2021 'BBB-';
--Unsecured senior
perpetual bonds 'BBB-'.
Braskem America Finance Company
--Long-term local and foreign
currency IDR 'BBB-';
--Unsecured senior notes due 2041 'BBB-'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.