Fitch Rates Braskem's Proposed Notes 'BBB-'
RIO DE JANEIRO -- January 16, 2014
Fitch Ratings has assigned a 'BBB-' to Braskem Finance Limited's proposed
notes issuance of approximately USD500 million due 2024, which will be
unconditionally guaranteed by Braskem S.A. (Braskem). The issuance will rank
pari passu with other unsecured and unsubordinated obligations of Braskem. The
issuance proceeds will be used to refinance indebtedness.
Fitch currently rates Braskem as follows:
--Long-term foreign Issuer Default Rating (IDR) 'BBB-';
--Long-term local currency IDR 'BBB-';
--National scale rating 'AA+(bra)'.
Braskem Finance Limited
--Long-term foreign currency IDR 'BBB-'.
The Rating Outlook is Negative.
KEY RATING DRIVERS
Braskem's ratings reflect its leading position in the Latin American
petrochemical sector, as the sole thermoplastic resin producer in Brazil and
its ongoing challenges as global high cost producer. The ratings also reflect
ownership stakes of Grupo Odebrecht and Petroleo Brasileiro S.A (Petrobras;
local and foreign currency IDR of 'BBB', Stable Outlook by Fitch) in Braskem
of 38.3% and 35.8%, respectively. Further factored into the company's ratings
are its strong liquidity position and manageable debt amortization schedule.
Braskem's Negative Outlook reflects high leverage for the rating category. The
company continues to take extraordinary measure - such as assets sales - to
lower debt. Fitch envisages a potential positive trend for cash flow recovery
as result of medium-term fiscal incentives, healthy petrochemical spreads and
BRL depreciation. If this scenario materializes in 2014, the company's Rating
Outlook should be revised to Stable.
High Production Costs Challenges Robust Business Position
Braskem's large dependence on naphta, which represents 70% of Braskem total
feedstock, currently positioned it as a high cost producer. During 2011 and
2012, in a scenario of depressed petrochemical spreads, Braskem was not able
to implement a pass-through of higher raw materials prices due to fierce
competition with imports, despite having a market position in Brazil of almost
100% in thermoplastic resins production and about 70% of the domestic sales
market. The company's position improved during 2013 due to the depreciation of
the Brazilian real, healthy international petrochemical prices and initiatives
by the Brazil government to support the competitiveness of the local industry
through tax decreases. The company is also constructing a greenfield
polyethylene project in Mexico that should improve Braskem's competitive
position once it becomes fully operational in 2016. The impact upon the
company will be limited; however, as the plant is projected to generate only
about 25% of the company's future cash flow.
Operating Cash Flow Recovery Depends on Government Incentives and Favorable
Braskem's operating cash flow is sensitive to fiscal incentives, a scenario of
stronger petrochemical spreads, and the appreciation of the U.S. dollar versus
the Brazilian real. Fitch expects fiscal incentives to improve the company's
cash flow by around BRL650 million in 2013, BRL1 billion in 2014 and 2015,
BRL650 million in 2016 and BRL120 million in 2017, when the incentives are
scheduled to be rescinded. Fitch's base case scenario foresees BRL3 billion in
funds from operations (FFO) and BRL4.6 billion in EBITDA in 2013. These
figures compare favorably with BRL1.5 billion and BRL3.5 billion,
respectively, in 2012, and BRL2.9 billion and BRL4.5 billion during the latest
12 months (LTM) ended Sept. 30, 2013.
Braskem has been able to sell BRL995 million of Fitch's expected amount of
asset sale of BRL1.5 billion, but BRL315 million has just been announced and
should be received through first semester of 2014. The negative impact of its
shortfall upon the company's goal of deleveraging has been mitigated to an
extent by the combination of stronger cash flow generation. Fitch's expects
free cash flow to be marginally positive in 2013 and be more robust in 2014.
The first disbursement of the Mexico project financing (USD1.5 billion), under
non-recourse conditions, has allowed Braskem to receive USD649 million to
prepay its bridge loan, which has positively contributed to lower its
leverage. For 2013, Fitch projects a decline in Braskem's leverage to move
around 3.3 times (x) during 2013 from the 4.5x in 2012. Leverage should then
move around to 2.5x in 2014 as the company receives a full years benefit from
the tax reductions.
Proactive Liability Management/Robust Liquidity
Braskem's management has adopted a conservative and pro-active financial
strategy to limit the risks associated with its exposure to the cyclic and
capital intensive nature of its business. The company has a robust liquidity
position and a manageable debt amortization profile with BRL3.9 billion of
cash and marketable securities as of Sept. 30, 2013. The company's liquidity
position is further supported by BRL450 million and USD600 million of undrawn
standby credit lines due 2016, without material adverse change clauses. These
levels of liquidity compare with BRL2.2 billion of short-term debt. As of
Sept. 30, 2013, Braskem had BRL19.7 billion of total adjusted debt. This debt
incorporates BRL1.1 billion debt of tax related debt (Refis) and excludes the
project finance debt related to the project in Mexico of BRL3.3 billion that
is a non-recourse project finance modality.
Braskem's inability to increase its cash flow generation or to reduce leverage
in the medium term will lead to a rating downgrade. Braskem's performance is
strongly focused on the Brazilian economy, as around 65% of its revenues are
generated in the local market. A downturn of the economy would weaken the
company's results and could also result in a negative rating action.
A rating upgrade is not likely until the company significantly improves its
operational performance and/or substantially lowers its financial obligations.
Continued strong performance throughout 2014 could result in the Rating
Outlook being revised to Stable from Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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